Key Takeaways
- Tax on transfers skipping a generation or more.
- Applies to gifts over $13.99M exemption in 2025.
- 40% tax rate on direct gifts, trusts, and distributions.
- Prevents avoiding estate tax by skipping heirs.
What is Generation-Skipping Transfer Tax (GSTT)?
The generation-skipping transfer tax (GSTT) is a federal tax on transfers of assets to recipients who are two or more generations below the transferor, such as gifts from grandparents directly to grandchildren. It aims to prevent wealthy families from avoiding estate taxes by skipping a generation in wealth transfers.
This tax imposes an additional layer of taxation on wealth that bypasses your children and passes straight to grandchildren or unrelated younger individuals.
Key Characteristics
GSTT has distinct features that influence estate planning and tax liabilities:
- Tax Scope: Applies to direct skips, taxable distributions, and taxable terminations involving skip persons.
- Tax Rate: Matches the highest federal gift and estate tax rate, currently 40% in 2025.
- Exemption Amount: A large exemption exists—$13,990,000 per individual or $27,980,000 for married couples in 2025, indexed for inflation.
- Who Pays: Tax liability varies by transfer type—transferor, recipient, or trustee may be responsible.
- Skip Persons: Includes lineal descendants more than one generation removed, as well as unrelated individuals significantly younger than the transferor.
How It Works
When you transfer assets directly to a skip person, the GSTT applies if the amount exceeds your exemption. For instance, gifting a large trust fund to a grandchild triggers this tax, with the transferor or estate liable for payment.
Distributions from irrevocable trusts to skip persons or terminations of interests in trust also trigger GSTT, with recipients or trustees responsible for the tax. Proper allocation of your exemption can reduce your inclusion ratio and minimize GSTT exposure.
Examples and Use Cases
GSTT primarily affects individuals with substantial estates who want to transfer wealth efficiently across generations.
- Grandparent to Grandchild: A grandparent gifting $1 million to a trust for a grandchild may allocate part of their GSTT exemption to reduce tax liability on future distributions.
- Business Succession: Families owning companies like Delta might use GSTT planning to pass shares to grandchildren while managing tax impacts.
- Estate Planning Strategies: Understanding your ability to pay taxation helps in structuring transfers that comply with GSTT rules and minimize taxes.
Important Considerations
Effective estate planning requires awareness of GSTT’s exemptions and tax rates, as these can significantly affect your wealth transfer strategy. Coordination with other tax rules, such as federal estate taxes, is essential to optimize outcomes.
Since GSTT can be complex, consulting professionals familiar with trust taxation and your specific financial situation is critical. Check out our guide on backdoor Roth IRA as an example of strategic tax planning in related areas.
Final Words
Generation-skipping transfer tax applies a 40% rate on transfers exceeding the exemption, impacting wealth passed to grandchildren or younger generations. Review your estate plan to see if your transfers approach the exemption limits and consult a professional to optimize tax efficiency.
Frequently Asked Questions
The Generation-Skipping Transfer Tax (GSTT) is a federal tax on transfers of assets to individuals more than one generation below the transferor, such as gifts from grandparents to grandchildren. It aims to prevent wealthy families from avoiding estate taxes through direct transfers to skip generations.
GSTT applies to transfers made to 'skip persons,' which include lineal descendants two or more generations below the transferor, like grandchildren and great-grandchildren, as well as unrelated individuals more than 37.5 years younger than the transferor.
In 2025, the GSTT tax rate is 40%, matching the highest federal gift and estate tax rate. The exemption amount is $13,990,000 per person or $27,980,000 for a married couple, with the exemption indexed for inflation and portable between spouses.
GSTT applies to direct skips (outright transfers or trusts to skip persons), taxable distributions (trust distributions to skip persons), and taxable terminations (when a trust interest ends and assets pass to skip persons).
The payer depends on the transfer type: the transferor or their estate pays for direct skips, the recipient pays for taxable distributions, and the trustee pays for taxable terminations.
Congress enacted the GSTT in 1976 to close loopholes that allowed wealthy families to avoid federal estate taxes by transferring wealth directly to grandchildren or later generations, ensuring that wealth is taxed at each generational level.
For example, if a grandparent gifts $1 million to a trust for a grandchild and allocates $500,000 of their GSTT exemption, the inclusion ratio is 0.5. This means 50% of future distributions to the grandchild from that trust would be subject to GSTT.
