Generation-Skipping Transfer Tax

The estate and gift tax system catches transfers from one generation to the next. But what happens if you skip a generation entirely, transferring assets directly from grandparent to grandchild? The generation-skipping transfer tax (GSTT) fills that gap.

Why Does the GSTT Exist?

The GSTT exists to prevent wealthy individuals from avoiding one generation of transfer tax:

• Without the GSTT, a grandparent could transfer assets directly to grandchildren, bypassing the estate tax that would have applied when the assets passed from parent to child
• The GSTT closes this loophole by imposing an additional tax on "skip" transfers

Example of the problem the GSTT solves:

• Without GSTT: Grandparent transfers $10M directly to grandchild; only ONE transfer tax event
• With normal succession: Grandparent to parent (taxed) then parent to grandchild (taxed again); TWO transfer tax events
• The GSTT ensures the skipped generation's tax is still collected

Exam Tip: Gotchas

• The GSTT is in ADDITION to estate or gift tax. It does not replace them. A transfer to a grandchild can trigger both the gift tax and the GSTT on the same transfer.

What Are the Key Features of the GSTT?

Types of generation-skipping transfers:

• Direct skips: Transfers directly to a person two or more generations below the transferor (e.g., grandparent to grandchild)
• Taxable distributions: Distributions from a trust to a skip person
• Taxable terminations: When a trust interest terminates and skip persons become the beneficiaries

Exam Tip: Gotchas

• The GSTT exemption is NOT portable between spouses. Both the estate tax exclusion and the GSTT exemption are $15 million per person, but only the estate/gift tax exclusion can be transferred to a surviving spouse via Form 706. The GST exemption is use-it-or-lose-it.
• The GSTT rate is a flat 40%, not graduated. Unlike income tax brackets, the GSTT applies the full 40% rate to any amount exceeding the exemption.

How Does the GSTT Exemption Compare to the Estate/Gift Exclusion?

Think of it this way: The estate/gift tax exclusion and the GSTT exemption are the same dollar amount, but they work independently. A married couple can combine their estate tax exclusions (portability), but each spouse's GSTT exemption expires unused if not allocated during their lifetime.

What Should You Check on Exam Day?

• The GSTT is a flat 40% tax added ON TOP of any gift or estate tax, not a substitute for it.
• Direct skips, taxable distributions, and taxable terminations all count as generation-skipping transfers.
• The $15 million GST exemption is use-it-or-lose-it per person; it does NOT transfer to a surviving spouse the way the estate/gift exclusion does.