Generation Skipping Transfer Tax (GSTT)
The Generation Skipping Transfer Tax (GSTT) is a federal tax imposed on transfers of wealth that skip a generation, such as gifts or inheritances made to grandchildren or other beneficiaries at least 37.5 years younger than the donor. The purpose of the GSTT is to prevent families from avoiding estate taxes by transferring assets directly to younger generations (e.g. grandchildren), bypassing the intermediate generation (e.g., children). The tax applies in addition to any applicable estate or gift taxes, creating a potential double-taxation scenario.
The GSTT applies to both direct transfers to “skip persons” (e.g., grandchildren) and indirect transfers, such as those made through certain trusts designed to benefit multiple generations. However, there is a lifetime GSTT exemption that allows individuals to transfer a certain amount, free of GSTT, either directly or in trust for the benefit of a skip person.
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