In the United States tax system, transfers of wealth are subject to taxation at multiple levels. In addition to the gift tax and the estate tax, there exists a third, less well-known but important special tax: the generation-skipping transfer tax (GSTT).
The placement of the GSTT within the tripartite system of gift and estate taxes
The U.S. wealth transfer tax system is built on three closely interrelated pillars: the gift tax, the estate tax, and the generation-skipping transfer tax, which is the subject of this article.
The purpose of the GSTT is to prevent tax avoidance in cases where the owner of the property “skips” their direct heir (for example, their child) and transfers the assets directly to their grandchild or a more remote descendant. In such cases, according to the legislator, a transfer occurs that “skips” a taxable generation; therefore, the GSTT acts as a supplementary tax to the otherwise applicable gift or estate tax.
In practical terms, the GSTT does not replace but rather layers on top of the other taxes: first, it is determined whether a gift or estate tax liability exists, and then—if the beneficiary qualifies as a “skipped person”—the GSTT is also applied.
This system ensures that wealth remains taxable at every generational transfer, even when the transfer is made directly to a more distant descendant.
Thus, the purpose of the GSTT is to prevent the “tax-free” inheritance of wealth when the property owner omits the intermediate generations and transfers assets directly to grandchildren or other persons at least two generations younger.
This tax therefore complements, rather than replaces, the gift and estate taxes.
What Qualifies as a Generation-Skipping Transfer?
Three main types are distinguished:
Direct Skips
When property is transferred directly to a “skip person,” that is, a person two or more generations younger.
Taxable Distributions
When income or principal is distributed from a trust to a “skip person,” while other (non-skip) beneficiaries also have an interest in the trust. In this case, the beneficiary (transferee) bears the tax.
Taxable Terminations
When the interest of a non-skip person in a trust terminates (e.g., by death or expiration of a term), and the remaining property passes to a skip person. In this case, the trustee is responsible for paying the tax.
Who Qualifies as a “Skip Person”?
A “skip person” may be:
- a natural person who is at least two generations younger than the transferor (e.g., a grandchild
- or great-grandchild), or
- a trust in which all beneficiaries are skip persons.
If the parties are not related, the generational difference is determined based on age:
- anyone not more than 12.5 years younger is considered of the same generation,
- every additional 25 years constitutes a new generation.
Tax Base and Rate
The GSTT is calculated as follows:
- Tax base = fair market value (FMV) of the transferred property,
- Tax rate = maximum federal estate tax rate (40% in 2025) × inclusion ratio.
The inclusion ratio expresses the proportion of the property that falls within the taxable versus exempt portion based on the available exemption.
Exemptions and Reliefs
In 2024, every taxpayer is exempt from the GSTT up to USD 13.61 million. This amount—adjusted for inflation—may be used during the taxpayer’s lifetime or upon death to claim exemption from the GSTT. If spouses elect gift splitting, the exemption amount doubles, allowing transfers up to USD 27.22 million to be tax-free.
Relation to Other Taxes
The GSTT does not apply if:
- no federal gift or estate tax is triggered, or
- the property is held in a trust with a general power of appointment that causes inclusion in the decedent’s estate.
The main purpose is to prevent wealth from passing through multiple generations without incurring tax at the intermediate generational levels.
Summary The GSTT is a key factor in U.S. estate planning and wealth transfer structures. Especially in the case of high-value estates—where planning spans multiple generations—failure to consider the GSTT can result in significant tax risk. In international estate planning (for example, U.S. family trusts or multigenerational inheritance structures), understanding the GSTT is essential from both a tax and compliance perspective.
The information provided in this article is for informational purposes only and does not constitute tax or legal advice.
Sources
- [1.] About Form 706-GS (T), Generation Skipping Transfer Tax Return for Terminations About Form 706-GS (T), Generation Skipping Transfer Tax Return for Terminations | Internal Revenue Service (Downloaded: 10/29/2025)
- [2.] The Generation-Skipping Transfer Tax (GSTT) IF13053.2.pdf (Downloaded: 10/29/2025)
- [3.] What Is the Generation-Skipping Transfer Tax (GSTT) and Who Pays? What Is the Generation-Skipping Transfer Tax (GSTT) and Who Pays? (Downloaded: 10/29/2025)
- [4.] What is the Generation-Skipping Transfer Tax? What is the Generation-Skipping Transfer Tax? - TurboTax Tax Tips & Videos (Downloaded: 10/29/2025)
- [5.] Understanding the Generation-Skipping transfer tax Generation skipping transfer tax (GSTT) explained | Fidelity (Downloaded: 10/29/2025)
- [6.] Estate and gift taxes Estate and gift taxes | Internal Revenue Service (Downloaded: 10/29/2025)