Legal Definitions - generation-skipping transfer tax

The generation-skipping transfer tax is a tax that was created in 1976 to prevent wealthy individuals from avoiding estate and gift taxes by making gifts or bequests to their grandchildren and other younger individuals. This tax applies to gifts made through trusts to family members and others who are a generation younger than the creator of the trust.

For example, if a grandparent creates a trust for their grandchild and the grandchild is 20 years old, the generation-skipping transfer tax would apply because the grandchild is a generation younger than the grandparent.

The generation-skipping transfer tax is designed to tax these kinds of transfers similarly to other large gifts and bequests. Any generation-skipping transfers above the applicable exclusion amount are taxed at the highest rate that applies to other transfers. In 2022, a 40% generation-skipping transfer tax applies to amounts above $12,060,000 gifted to individuals 37 ½ years younger than the creator of the trust.

However, individuals can still create dynasty trusts which may avoid all gift taxes and the generation-skipping tax when transferred to younger generations.

Overall, the generation-skipping transfer tax is a way to prevent wealthy individuals from avoiding taxes by making gifts or bequests to younger generations.