The generation-skipping transfer tax is a federal tax applied to gifts or inheritances, designed to stop donors from dodging estate taxes by giving directly to grandchildren instead of their children. Thanks to this tax, grandchildren get the same amount as if the inheritance was coming from their parents.
Before this tax came into play in 1976, rich folks could legally pass on money and property to their grandkids without having to pay federal estate taxes, unlike if they had given it to their kids. This law effectively closed the loophole that allowed inheritances to skip a generation to escape double taxation on estates.
Learn more about Generation-Skipping Transfer Tax
The generation-skipping transfer tax (GSTT) is an extra tax on property transfers that skip a generation, which is called a generation-skipping transfer (GST) for short. The GSTT was created to stop families from dodging the estate tax for one or more generations by giving gifts or bequests straight to grandchildren or great-grandchildren.
By skipping the parent’s generation, it helps avoid the inheritance being taxed under estate taxes twice. The GSTT makes sure that grandchildren receive the same value of assets they would have gotten if the inheritance had come directly from their parents instead of their grandparents.
The person who gives the gift is called the transferor, while the recipient is known as the skip person. Many people choose a grandchild as a skip person, but it doesn’t have to be a family member. Anyone can be a recipient of a generation-skipping transfer as long as they are at least 37½ years younger than the transferor.
The generation-skipping transfer tax only kicks in if the transfer avoids triggering a gift or estate tax at each generation level. To compensate for the taxes that might be skipped by bypassing one generation, the Internal Revenue Service (IRS) adds a second layer of tax on gifts and bequests that exceed the estate and lifetime gift exclusion. This means that the GSTT is only applicable when a beneficiary receives amounts that go beyond the GST estate tax credit.
Conclusion
The generation-skipping transfer tax (GSTT) is a federal tax applied to property passed on to a beneficiary (other than a spouse) who is at least 37½ years younger than the person giving the gift or bequest. This tax was created to close a loophole that let wealthy individuals dodge estate taxes by leaving inheritances to grandchildren instead of their own children.
The GSTT has a flat rate of 40%, but most estates won’t ever have to pay it. Estates need to exceed the federal estate tax exemption, which was increased by the Tax Cuts and Jobs Act in 2017 and later adjusted for inflation. In 2024, estates must be over $13.61 million to incur estate taxes; in 2025, that threshold goes up to $13.99 million.