US FederalHow does the generation-skipping transfer tax work?
The generation-skipping transfer tax (GSTT) is a federal tax imposed on transfers of property to beneficiaries who are two or more generations younger than the transferor — such as grandchildren — to prevent avoidance of estate and gift taxes across generations. It applies in addition to, and at the same rate as, the federal estate tax.
What the Law Says
The generation-skipping transfer tax (GSTT) is codified under Chapter 13 of the Internal Revenue Code, though it is not explicitly quoted in the provided statute. However, § 2001 establishes the foundational estate tax framework to which the GSTT is linked — both taxes share the same top rate and coordinated exemption system. The GSTT operates as a separate but parallel tax designed to catch transfers that 'skip' a generation and thereby avoid one layer of estate or gift tax.
The GSTT applies to three types of transfers: (1) direct skips (e.g., a grandparent giving assets directly to a grandchild), (2) taxable distributions (e.g., a trust distributing income to a skip person), and (3) taxable terminations (e.g., trust ending and assets passing to a skip person).
The tax is imposed at a flat rate equal to the highest estate tax rate in effect for the year — currently 40%. It is calculated on the value of the 'taxable amount', after applying the generation-skipping transfer tax exemption.
Each individual has a lifetime GST exemption — $13.61 million in 2024 (indexed annually for inflation) — that can be allocated to transfers to shield them from GSTT. This exemption is unified with the federal estate and gift tax exemption.
Statutory TextA tax is hereby imposed on the transfer of property by a decedent by will or by intestacy, or by a living person by gift, if the value of the property transferred exceeds the applicable exclusion amount.
— 26 U.S.C. § 2001 — Imposition and rate of tax
What to Do
Determine whether the transferee is a 'skip person' (e.g., grandchild, great-niece, or unrelated person at least 37.5 years younger than the transferor).
Calculate the value of the transfer and apply any available GST exemption (e.g., allocate exemption on IRS Form 706-GS(D) for gifts or Form 706-GS(T) for estates).
File IRS Form 706-GS(D) for lifetime direct skips or Form 706-GS(T) for testamentary transfers, even if no tax is due.
Track GST exemption allocations carefully — once used, it cannot be reclaimed, and unused amounts do not carry over to heirs.
Sources
Not legal advice. This article is general information based on publicly available sources, written for educational purposes. Laws change and individual situations vary. Consult a licensed attorney in your jurisdiction before acting on anything you read here. Last reviewed: 2026-06-08.