Legal Definitions - generation-skipping transfer

A generation-skipping transfer is a type of gift made through a trust to family members or others who are a generation younger than the person creating the trust. This type of transfer was used in the past to avoid estate and gift taxes that would normally apply to large gifts or bequests. However, the generation-skipping transfer tax was created to close this loophole and tax these types of transfers similarly to other large gifts and bequests.

For example, if a wealthy grandparent wanted to leave a large sum of money to their grandchild, they could create a trust and make a generation-skipping transfer to avoid paying estate and gift taxes. However, with the generation-skipping transfer tax, this type of transfer would be taxed similarly to other large gifts and bequests.

The generation-skipping transfer tax applies to transfers above the applicable exclusion amount, which is currently $12,060,000 in 2022. Any amount gifted above this exclusion amount to individuals who are 37 ½ years younger than the creator of the trust will be taxed at a rate of 40%. However, individuals can still create dynasty trusts, which may avoid all gift taxes and the generation-skipping tax when transferred to younger generations.