Generation-Skipping Transfer Tax (GSTT)

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What is the Generation-Skipping Transfer Tax (GSTT)?

The generation-skipping transfer tax (GSTT) is a federal tax that applies when property is transferred by gift or inheritance to a beneficiary who is at least 37½ years younger than the transferor (commonly grandchildren). It was created to prevent families from avoiding estate taxes by “skipping” a generation—so the tax system treats a transfer to a grandchild similarly to one that would have passed through the child’s estate.

Key points:
* GSTT applies to transfers (gifts or bequests) that bypass a generation and would otherwise avoid estate or gift tax at an intermediate generation.
* The current federal GSTT rate is a flat 40%.
* Most people never pay GSTT because of a large lifetime exemption that shields transfers up to a high threshold (adjusted annually and generally combined for married couples).

How the GSTT works

A transferor (the person making the gift or bequest) may name a skip person (the recipient who is 37½+ years younger). GSTT is assessed only when the transfer would otherwise avoid gift or estate tax at the skipped generation and the transfer exceeds the available GST exemption (part of the unified estate/gift exemption).

Only the portion of transfers that exceeds the exemption is subject to the 40% GSTT.

Direct vs. indirect skips

GSTs are taxed differently depending on the transfer structure:

  • Direct skip
  • A direct transfer of property to a skip person that is subject to gift or estate tax (e.g., a grandparent gifts assets directly to a grandchild).

  • The transferor (or the transferor’s estate) is generally responsible for paying the GSTT on direct skips.

  • Indirect skip

  • A transfer that reaches a skip person after an intermediate interest (usually through a trust). Two common types:
    • Taxable termination — property held for a non-skip beneficiary (e.g., the child) with the remainder passing to a skip person when the non-skip beneficiary’s interest ends (commonly at that beneficiary’s death). The termination can trigger GSTT on the remainder interest.
    • Taxable distribution — a distribution from a trust to a skip person that is not otherwise subject to gift or estate tax. In these cases the skip person (recipient) may be responsible for GSTT on the distribution.

Reporting and forms

  • Gifts and generation-skipping transfers made during life are reported on Form 709 (United States Gift (and Generation-Skipping Transfer) Tax Return).
  • Certain trust terminations and distributions may require Form 706-GS(T) or related IRS filings at death or termination.

Exemptions and interaction with estate/gift tax

  • GSTT uses the same unified credit system as federal estate and gift tax: transfers up to the GST exemption amount are not subject to GSTT. The exemption has been substantially increased in recent years and is adjusted annually for inflation.
  • Married couples can generally elect to combine or “port” exemptions, effectively doubling the amount shielded from transfer taxes.
  • Only transfers exceeding the federal exemption are taxed at 40% for GSTT.

Tax-planning strategies

  • Dynasty trusts — Trusts designed to preserve family wealth across generations while minimizing repeated estate taxation. Properly drafted dynasty trusts can allocate GST exemption and control distributions so the trust principal avoids repeated estate tax bite at each generation.
  • Use of lifetime gift exemptions and annual exclusion gifts to reduce the taxable estate while allocating GST exemption where appropriate.
  • Professional advice — GST rules are complex (especially with trusts and indirect skips). Work with an estate-planning attorney or tax advisor to apply exemptions, draft documents, and prepare required returns.

Who typically pays the GSTT?

  • For direct skips, the transferor (or the transferor’s estate) usually pays the tax.
  • For indirect skips (taxable distributions or terminations), the tax liability may fall on the trust or on the skip person who receives the distribution.

State rules

Some states impose their own estate or generation-skipping taxes. State rules and exemptions can differ from federal law, so check state tax law where relevant.

Bottom line

The GSTT is a federal backstop against skipping a generation to avoid estate and gift taxes. While the tax rate is a flat 40% on amounts exceeding the GST exemption, most families are unaffected because of the high federal exemption and planning opportunities. When transfers involve trusts, multiple generations, or significant wealth, careful planning and professional guidance are essential to manage GST exposure and reporting obligations.