How the Generation Skipping Transfer (GST) Works
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The generation skipping transfer tax (GST) is a federal tax imposed on transfers of property made from a person to someone who is at least two generations below the giver. Since the transfer “skips” the generation between the transferee and the transferor, the transferee is often called a “skip-person.” While the GST tax is most commonly seen applied in situations where a grandparent leaves their grandchild a devise or trust, this tax also applies to any transfer made to an unrelated skip-person who is at least 37.5 years younger than the transferee. The GST does not apply to spouses, however, no matter the age difference.
GST Tax: Its History and the Current Rates
The GST tax was introduced by Congress in 1986. The GST was implemented as a reaction to the realization that people could avoid paying estate taxes by simply leaving their property to their grandchildren instead of their immediate offspring (children). Because estate taxes are applied when a transfer is made from generation to generation, the value of a large transfer passed down first to a child, and then from a child to a grandchild, may get significantly whittled down after two generations of estate tax. For many years, people were able to circumvent the estate tax completely, by passing it directly to a skip-person.
As there are with many types of federal taxes, there are exemptions for the GST tax. Before 2001, the GST tax was 55% of any part of a transfer of property that was valued at over $1,000,000. Since 2001, as part of the “Bush tax-cuts,” the GST exemption has steadily risen and the tax rate has gone down. As part of the Tax-Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, the GST was temporarily extinguished for any transfers under $5,000,000 (indexed for inflation after 2011). However, as scheduled by the Act, and the end of the Bush tax-cut plan, the 2011 GST tax was set at 35% for 2011 and 2012 for any part of a transfer made over the exemption amount (also known as the exclusion amount). In January, 2013, the American Taxpayer Relief Act of 2012 (ATRA) was signed, changing the GST tax rate to 40% from a maximum of 35%.
The exemption amount was also increased over the years; those amounts are adjusted annually for inflation. For deaths in 2019, the GST tax exemption amount is $11.4 million, which is up from $11.18 million in 2018. (With the passage of the 2017 Tax Cuts and Jobs Act, the basic GST exemption amount was doubled; however, starting in 2026, the exclusion amount will revert to 2017 levels.)
GST Tax Planning
It is crucial to plan for the transfer of your property when you think it could be subject to the GST transfer tax. An estate planning attorney is a valuable asset when determining which property you should subject to estate taxes, and which property should have the GST exemption applied to. If you have further questions about the GST tax, or want to begin the estate planning process, contact an estate planning or tax attorney in your area.