IRC 2611: What Is a Generation-Skipping Transfer?

The Generation-Skipping Transfer Tax (GSTT) is a federal tax applied in addition to any federal gift or estate taxes. Its purpose is to ensure wealth is taxed at each generational level by targeting transfers to beneficiaries who are significantly younger than the person giving the property. This prevents assets from being passed down through long-term trusts or direct gifts that bypass a generation’s worth of estate taxes.

The GSTT is set at the highest federal estate tax rate of 40%. However, it only applies to transfers that exceed a lifetime exemption amount, which is $13.99 million per person for 2025.

Defining a Generation-Skipping Transfer

A generation-skipping transfer (GST) is a transfer of property to an individual or a trust classified as a “skip person.” The recipient’s status as a skip person is the element that triggers the tax. Without a transfer to a skip person, the GSTT does not apply.

The Internal Revenue Code identifies three types of these transfers: Direct Skips, Taxable Distributions, and Taxable Terminations. A Direct Skip is a straightforward transfer to a skip person, while a Taxable Distribution is a payment from a trust to a skip person. A Taxable Termination happens when an interest in a trust ends, leaving only skip persons as the remaining beneficiaries.

Identifying a Skip Person

A “skip person” is determined by generation assignment rules that categorize recipients as either natural persons or trusts. Correctly classifying a beneficiary is the first step in determining if a generation-skipping transfer has occurred.

Natural Persons

For a natural person, the classification depends on their relationship to the transferor. A lineal descendant, such as a grandchild or great-grandchild, is a skip person if they are two or more generations below the transferor. For example, a gift from a grandparent to their grandchild is a transfer to a skip person.

When the recipient is not a lineal descendant, the determination is based on age. A non-lineal individual is a skip person if they are more than 37.5 years younger than the transferor. This applies to friends or distant relatives, and for instance, if a 70-year-old makes a gift to a 30-year-old friend, the friend is a skip person.

Trusts

A trust is classified as a skip person under two conditions. The first is if all individuals with an interest in the trust are skip persons, such as a trust created only for the grantor’s grandchildren. The second condition applies if no one holds an interest in the trust at the time of transfer, and no future distributions can be made to a non-skip person.

This rule prevents using a trust to avoid an immediate GSTT, only to later distribute funds to a non-skip person. If there is any possibility of a non-skip person benefiting, the trust is not a skip person.

The Predeceased Ancestor Rule

An exception to these rules is the “predeceased ancestor rule.” This applies when a beneficiary’s parent, who is a lineal descendant of the transferor, is deceased at the time of the transfer. The beneficiary is then moved up to the generation of their deceased parent. For example, if a grandparent gifts to a grandchild whose parent is deceased, the grandchild is treated as being in their parent’s generation, making them a non-skip person for that transfer.

Types of Taxable Transfers

Three specific events trigger the GSTT, each with different rules for the timing of the tax and who is responsible for payment.

Direct Skip

A Direct Skip is a transfer made to a skip person that is also subject to federal gift or estate tax. The most straightforward example is a grandparent making an outright gift of cash or property to a grandchild. The liability for paying the GSTT falls on the transferor.

If the transfer is made during life, it is reported on a gift tax return; if it occurs at death, it is reported on the estate tax return. The tax is calculated on the value of the property the skip person receives.

Taxable Distribution

A Taxable Distribution is any distribution of income or principal from a trust to a skip person. For example, if a trust benefits a child and their descendants, any payment from the trust to a grandchild is a Taxable Distribution. The responsibility for paying the GSTT falls on the recipient, who is the skip person. The recipient must report the distribution and pay the tax, and the trustee is required to provide the necessary information to do so.

Taxable Termination

A Taxable Termination occurs when a non-skip person’s interest in a trust ends, leaving only skip persons with an interest in the property. This can happen upon the death of a beneficiary or the end of a trust’s term. For example, consider a trust that pays income to a child for life, with the remainder going to grandchildren. The child’s death triggers a Taxable Termination because the grandchildren are now the only beneficiaries. In this case, the trustee is liable for paying the GSTT from the trust’s assets.

Exclusions from Generation-Skipping Transfers

Even when a transfer is made to a skip person, it may not be a GST if it meets certain statutory exclusions. The Internal Revenue Code provides specific exceptions for payments made for educational and medical purposes, which align with similar provisions for the federal gift tax.

Educational Exclusion

An exclusion applies to unlimited tuition payments made on behalf of a skip person. To qualify, the payment must be made directly to a qualifying educational institution, not to the skip person. The exclusion is limited to tuition costs and does not cover expenses such as books, supplies, or room and board.

Medical Exclusion

A similar exclusion exists for payments for a skip person’s medical care. The payment must be made directly to the medical provider, such as a doctor or hospital, or to an insurer for medical insurance premiums. This exclusion is also unlimited in amount, provided the direct payment requirement is met.

These exclusions also apply to distributions from a trust. If a trustee makes a direct payment from the trust to an educational institution for a skip person’s tuition or to a medical provider for their care, that distribution is not considered a taxable distribution.