What is the Generation-Skipping Transfer (GST) tax and when does it apply?

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AcadiFi · Accepted Answer

The Generation-Skipping Transfer (GST) tax is a separate federal tax imposed on transfers that 'skip' a generation — typically from grandparent to grandchild or to unrelated beneficiaries more than 37.5 years younger. It exists to prevent families from avoiding the estate tax at the skipped generation.

The GST tax rate equals the highest estate tax rate (40%) and applies IN ADDITION TO gift or estate tax on the same transfer. Example: Winifred Langston transfers $1M directly to her granddaughter Philippa. If Winifred has used all her lifetime exemption, she owes 40% gift tax ($400,000) PLUS 40% GST tax on the remaining $600,000 going to Philippa ($240,000) — an effective rate approaching 64% for direct skips.

Three types of GST transfers: (1) Direct skip — transfer directly to a skip person (grandchild). (2) Taxable distribution — trust distribution to a skip person. (3) Taxable termination — a trust interest terminates leaving only skip persons as beneficiaries.

Key relief: every individual has a GST exemption equal to the estate/gift exemption ($13.61M in 2024, scheduled to sunset). Applying GST exemption at transfer yields an 'inclusion ratio' of zero, making future distributions GST-free. Sophisticated planners leverage GST exemption via Dynasty Trusts — long-term (multi-generational or perpetual in some states like South Dakota, Nevada, Delaware) trusts where the full exemption is applied at funding, making all future growth and distributions exempt from estate, gift, and GST taxes across many generations.

Predeceased parent exception: if the parent (non-skip generation) has died, grandchildren are not skip persons — transfers are taxed as if to the next-in-line generation, avoiding GST.

What is the Generation-Skipping Transfer (GST) tax and when does it apply?

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