The Generation Skipping Transfer Tax is a tax imposed on transfers of assets to individuals who are two or more generations younger than the transferor. This tax is in addition to any estate or gift taxes that may be applicable. The purpose of this tax is to prevent individuals from avoiding estate and gift taxes by transferring assets directly to their grandchildren or other younger individuals. The tax rate for generation skipping transfers is generally higher than the rates for estate and gift taxes.
The GSTT is a federal tax on transfers of property to a person who is two or more generations below the transferor, such as a grandchild.
The GSTT applies to transfers made during lifetime or at death to a skip person, which includes grandchildren, great-grandchildren, or individuals more than 37.5 years younger than the transferor.
As of 2021, the GSTT exemption amount is $11.7 million per individual, meaning that transfers up to this amount are not subject to the tax.
Certain transfers, such as direct payments for educational or medical expenses, are exempt from the GSTT. Additionally, there are special rules for transfers to certain trusts.
The GSTT is calculated at a flat rate equal to the maximum federal estate tax rate, which is currently 40%.
There are various estate planning strategies that can be used to minimize or avoid the GSTT, such as making use of the annual gift tax exclusion or creating generation-skipping trusts.
Transfers subject to the GSTT must be reported on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, and filed with the IRS.
Failure to pay the GSTT can result in penalties and interest being assessed by the IRS.
The GSTT is subject to change through legislation, so it is important to stay informed about any potential changes to the tax law.
Consulting with a qualified estate planning attorney or tax advisor can help you develop a plan to minimize the impact of the GSTT on your estate.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 13th April 2024.
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