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Generation-Skipping Transfer (GST) Tax

See Also:


Skip person:
A person who is two or more generations younger than the transferor. See I.R.C. § 2613.

Direct Skip:
A transfer made to a “skip” person, whose ownership rights in the transferred money vest immediately.

Indirect Skip:
A transfer made to an entity (such as a trust) that may eventually vest in a skip person. If any of the transferred funds do vest in a skip person, then the transfer was an indirect skip.

The generation skipping transfer (“GST”) tax is a separate tax imposed on transfers to “skip” people. Broadly, these are defined as people who are:

  1. grandchildren or others more than two generations below the grantors, if this gift is to a lineal descendant or close relative (a great-nephew, for example, if also a “skip” person); or
  2. non-related persons who are more than 37 ½ years younger than the grantor.

The tax is imposed on both lifetime gifts and posthumous transfers.

This tax is imposed at the highest marginal rate of gift and estate tax (40% in 2017). See I.R.C. §§ 2601, 2613. There is a lifetime exemption of $5,490,000 (for 2017, but indexed for inflation) against transfers subject to the GST tax.

The purpose of the GST tax is to prevent people from avoiding estate tax by transferring assets to their grandchildren instead of their children, and thus avoiding the double tax liability that would have occurred had there been two transfers instead of one (one from parent to child and a second from child to grandchild). To circumvent this strategy, the government simply adds the GST tax to the regular estate tax (or gift tax) so that the government will get their double taxation in any case.


Just as with the gift tax, annual exclusion gifts and direct payments for educational and/or medical expenses are not subject to the GST tax. However, special provisions are required to qualify gifts in trust for the GST annual exclusion. See I.R.C. § 2642(c)(2).

There is also an annual exclusion for the GST tax just as there is for the gift tax ($14,000 in 2017). Though they do not work in precisely the same manner, they work in a manner that is close enough so that a discussion of the distinctions is beyond the scope of this course.

Direct and Indirect Skips

Sometimes a gift or bequest to a “skip” person may not vest immediately in that person. For example, a gift could be to a trust which the grandchild may potentially receive assets from, but which gifts are not guaranteed to eventually go to the skip person. In such a case, the taxpayer (or his or her executor if after death) may have the choice as to whether to allocate some of the taxpayer’s GST exemption (the $5,490,000) to the gift made to that trust. This is called an “indirect” skip (as opposed to a transfer directly to a skip person, which is a direct” skip).

If exemption is not allocated to that transfer and money is later paid from the trust to a skip person, this money may be subject to GST tax. Whether and when to allocate available GST exemption to a specific transfer is a complex decision that depends on many factors and should only be made by an expert in transfer tax law.