What Is an Indirect Skip for Gift Tax Purposes?

The federal Generation-Skipping Transfer (GST) tax is imposed on wealth transfers to individuals more than one generation younger than the donor. This tax prevents families from avoiding estate taxes by giving assets directly to grandchildren or more remote descendants, and it applies to both lifetime gifts and transfers after death. Transfers subject to the GST tax can be direct, like an outright gift to a grandchild, or indirect. An indirect transfer is more nuanced, involves the use of a trust, and has specific tax consequences.

Defining an Indirect Skip

An indirect skip is a lifetime transfer of property to a “GST trust” from which a distribution could be made to a “skip person.” A skip person is a beneficiary two or more generations younger than the donor, such as a grandchild, while a “non-skip person” is someone in a closer generation, like a child. The defining element is the use of a GST trust. Under Internal Revenue Code Section 2632, a trust is considered a GST trust if its funds could potentially be distributed to a skip person.

This broad definition captures many common arrangements. For example, if a trust for a child also permits distributions to grandchildren, any gift to that trust is an indirect skip. The transfer is “indirect” because the distribution to the skip person is not guaranteed. The trustee may have the discretion to distribute funds to non-skip persons, skip persons, or both.

To be excluded from the GST trust definition, a trust’s terms must meet restrictive conditions, such as requiring that over 25 percent of its assets be distributed to a non-skip person. Since many family trusts lack such rigid mandates, they are often classified as GST trusts, making contributions to them indirect skips.

The Automatic Allocation of the GST Exemption

When a donor makes an indirect skip, the IRS automatically allocates the donor’s lifetime GST exemption to the transfer. Every individual has a large exemption amount to shield transfers from the GST tax. For 2025, this exemption is $13.99 million per person, though it is scheduled to be reduced by about half in 2026 without new legislation. This automatic allocation rule means a donor’s unused GST exemption is applied to the transfer by default.

The allocation is calculated to make the “inclusion ratio” for the property zero, making that portion of the trust’s assets exempt from future GST tax. This process occurs without the taxpayer needing to file any forms. The rule protects taxpayers from accidentally triggering a large tax liability. Future distributions from a GST trust to a skip person could be taxed at the highest federal estate tax rate of 40%. By applying the exemption at the time of the gift, any appreciation on the assets is also sheltered from future GST tax.

Electing Out of Automatic Allocation

The automatic allocation of the GST exemption may not align with every donor’s estate plan. A donor might prefer to save their exemption for other transfers, like a direct skip to a grandchild or a different trust where a generation-skipping transfer is more certain. In these cases, the donor can elect out of the automatic allocation rule.

To do so, the donor must attach a specific statement to a timely filed U.S. Gift (and Generation-Skipping Transfer) Tax Return, Form 709. This statement must identify the trust and declare that the donor is electing out of the automatic allocation. The statement should specify which transfer or transfers the election applies to.

A donor can make this election for a single transfer or for all future transfers to a particular trust. This provides flexibility for those making ongoing contributions to a trust that they do not want covered by their GST exemption.

Reporting Indirect Skips on Form 709

Managing an indirect skip requires reporting it on Form 709, the U.S. Gift (and Generation-Skipping Transfer) Tax Return. A return may be necessary to address GST tax implications even if no gift tax is due. The initial gift to the trust is reported on Schedule A, Part 1. The GST-related aspects of the transfer are handled on Schedule D, Generation-Skipping Transfer Tax.

If the donor allows the automatic allocation to occur, the transfer is reported on Schedule D, Part 3. This part of the form is used for indirect skips and helps calculate the amount of GST exemption allocated. If the donor elects out of the automatic allocation, the prepared statement must be attached to Form 709. The donor must also indicate this election on the return itself to ensure no GST exemption is used for that transfer.