Generation-Skipping Transfer Tax (GSTT)
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.
Purpose of the GSTT
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.
Key Features
| Feature | Detail |
|---|---|
| Tax rate | Flat 40% (equal to the highest estate tax rate) |
| Relationship to other taxes | Imposed in addition to any gift or estate tax |
| GST exemption (2025) | $13.99 million per individual |
| Exemption portability | NOT portable between spouses |
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 $13.99 million per person (2025), 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.
GSTT vs. Estate/Gift Tax Exclusion
| Feature | Estate/Gift Tax Exclusion | GSTT Exemption |
|---|---|---|
| Amount (2025) | $13.99 million | $13.99 million |
| Portable between spouses? | Yes (via Form 706) | No |
| Top tax rate | 40% | 40% |
| Applied to | Transfers to any person | Transfers that skip a generation |
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.