How generation skipping transfer tax works

Generation assignment comes first

An individual assigned to a generation two or more generations below the transferor is generally a skip person. A grandchild is a familiar example, but a deceased parent can change that result.

If the grandchild's parent who was the transferor's child has died when the transfer is first subject to estate or gift tax, the grandchild is assigned to the transferor's child's generation for that transfer.

The three transfer categories

Direct skips

A direct skip is a transfer subject to estate or gift tax of an interest in property to a skip person.

Taxable distributions

A taxable distribution is a distribution from a trust to a skip person, excluding a taxable termination or a direct skip.

Taxable terminations

A taxable termination generally occurs when an interest in trust property ends through death, lapse of time, release of a power, or otherwise.

The general rule excludes a termination if a nonskip person holds an interest immediately afterward, or if no subsequent distribution, including a termination distribution, may go to a skip person.

A separate rule applies when an interest ends because a transferor's lineal descendant dies. A specified portion then distributed to skip persons or trusts exclusively for them is a taxable termination of that portion.

Exemption allocation and the applicable rate

On a lifetime direct skip, unused GST exemption is automatically allocated to the transferred property to the extent needed to make its inclusion ratio zero, unless the individual elects out for that transfer.

The applicable GST rate equals the maximum federal estate tax rate multiplied by the transfer's inclusion ratio. Use the maximum estate tax rate applicable when the taxable distribution, taxable termination, or direct skip occurs.

Keep the transfer's allocation records alongside its trust documents. For a focused discussion of allocation and estate tax inclusion periods, open the allocation guide in the resources below.

Excluded gifts and the additional trust conditions

A direct skip has a zero inclusion ratio to the extent it is a nontaxable gift under the gift tax annual exclusion, taking valid gift splitting into account, or the qualified tuition and medical payment exclusion.

The tuition exclusion requires payment directly to a qualifying educational organization for tuition only. The medical exclusion requires payment directly to the medical care provider for the individual's medical care.

For a gift in trust, the zero inclusion ratio rule has additional conditions. During the individual beneficiary's life, no income or principal may be distributed to or for anyone other than that beneficiary.

If the trust continues at the beneficiary's death, its assets must be includible in that beneficiary's gross estate.

In applying the lifetime distribution restriction, disregard possible satisfaction of state support obligations if that use is discretionary or permitted under state law substantially equivalent to the Uniform Gifts to Minors Act.

The gift tax exclusion alone does not establish that a trust meets these additional GST conditions.

Who pays the GST tax

• The recipient pays the tax on a taxable distribution.
• The trustee pays the tax on a taxable termination or a direct skip from a trust.
• The transferor pays the tax on a direct skip outside a trust.

The tax is charged to the transferred property unless the governing instrument directs otherwise by specifically referring to GST tax.

Two related terms

EstatePlanner.com resources to open next

• How GST exemption is allocated to trusts

  Open this next if your family transfer involves a trust. It focuses the next discussion on exemption allocation and estate tax inclusion periods.

• How gift tax returns document transfers and valuations

  Use this guide when you move from identifying the transfer category to reviewing the paperwork. Bring it to the person preparing your return and allocation records.

• How lifetime gifts and the annual exclusion work

  Read this alongside the trust conditions above when planning gifts to grandchildren. It provides a separate place to review the gift tax annual exclusion.

• Federal transfer tax records and questions checklist

  Use the checklist to organize your family transfer discussion. Keep your trust documents, prior returns, and allocation notices together while working through it.

A perspective on family continuity

Tax questions sit within a larger conversation about what a family wants to carry forward. One presenter described that aim this way.

"to provide them a more vertically integrated way of doing business and to provide them a platform to um ensure the proper succession uh and transfer from one generation to the next of the family and and to ensure that continuity"

Common questions