what is the generation skipping transfer tax gstt 
the generation skipping transfer tax is a federal tax on a gift or inheritance that prevents the donor from avoiding estate taxes by skipping children in favor of grandchildren with the generation skipping transfer tax grandchildren receive the same amount as if the inheritance were coming from their parents before the generation skipping transfer tax was introduced in 1976 wealthy individuals were legally able to gift money and bequeath property to their grandchildren without paying federal estate taxes the legislation effectively closed the loophole where inheritances could skip a generation to avoid double estate taxation 1understanding the generation skipping transfer taxthe generation skipping transfer tax gstt is an additional tax on a transfer of property that skips a generation known as a generation skipping transfer gst for short the gstt was implemented to prevent families from avoiding the estate tax for one or more generations by making gifts or bequests directly to grandchildren or great grandchildren the parent s generation is skipped to avoid an inheritance being subject to estate taxes twice the gstt ensures that grandchildren end up with the same value of assets that they would have had if the inheritance was transferred to them directly from their parents rather than their grandparents the person giving the gift is referred to as the transferor and the recipient is known as the skip person many people use a grandchild as a skip person but a skip person does not have to be a family member any individual is eligible to receive a generation skipping transfer as long as they are at least 37 years younger than the transferor 4the generation skipping transfer tax is imposed only if the transfer avoids incurring a gift or estate tax at each generation level to make up for the taxes that may be avoided by skipping one generation the internal revenue service irs imposes a second layer of tax on gifts and bequests above the estate and lifetime gift exclusion it means that the gstt is only due when a beneficiary receives amounts in excess of the gst estate tax credit 5direct vs indirect skips with the gsttthe taxation of a gst depends on whether the transfer is a direct or an indirect skip a direct skip is a property transfer that s subject to an estate or gift tax an example of a direct skip would be a grandmother gifting property to a grandchild the transferor or their estate is responsible for paying the gst tax for direct skips 6an indirect skip involves a transfer that has intermediate steps before reaching a skip person there are two types of indirect skips the taxable termination and the taxable distribution a taxable termination involves a skip person and a non skip person a non skip person is the primary beneficiary who will receive property before it is transferred to the skip person the transfer to the skip person occurs upon the death of a non skip person typically the child of the transferor 7as an example of a taxable termination consider a transferor who establishes an income producing trust for his son upon the son s death the remaining property would be passed on to the transferor s grandchild at which time those assets would be subject to the gst tax a taxable distribution refers to any distribution of income or property from a trust to a skip person that is not otherwise subject to estate or gift tax if a grandmother established a trust that made payments to her grandson those payments would be subject to gst taxes which the recipient is responsible for paying 8