Generation Skipping Transfer Tax

Who is Subject to the Generationn Skipping Transfer Tax?

Individuals making taxable gifts to grandchildren or other persons considered to be two or more generations younger may be subject to the federal Generation Skipping Transfer (GST) tax in addition to the gift tax.
Estates leaving property to individuals two or more generations younger than the decedent may be subject to the GST tax in addition to the estate tax. In most cases, generation assignments are based on family relationships or on the beneficiary’s age relative to the donor or decedent.
Transfers to a non-relative who is more than 37 ½ years younger than the donor may be subject to the GST tax.

How is the Tax Calculated?

Each individual has a $1,000,000 lifetime GST exemption. Thus, you can make taxable gifts or leave $1,000,000 to grandchildren without incurring any GST tax. The amount of the GST exemption is indexed for inflation beginning in 1999, rounded down to the nearest $10,000.

The GST tax is a flat tax. The rate of tax is the same as the maximum estate and gift tax rate in effect at the time of the transfer. Assuming no GST exemption is available, the effective GST tax rate is 55% on all taxable transfers.