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What Is Federal Generation-Skipping Transfer Tax (GST Tax)?

Prior to the enactment of the GST Tax, individuals were able to give or bequeath money and property directly to grandchildren without paying federal estate taxes. What? You mean there was a way to avoid paying the federal government? Not anymore! The GST tax put an end to it.

The GST tax was created to make sure no one would be able to skip out on taxes by skipping over a generation. A generation-skipping transfer (GST) refers to the shift of property either by gift or at death to an individual (known as the skip person) who is two or more generations below the person who is giving the gift (known as the transferor).

Generally, people use a grandchild as a skip person, but this skip person does not have to be a family member. Any individual is eligible as long as he or she is at least 37.5 years younger than the transferor. This does not include your husband or wife even if your spouse is 37.5 years younger than you.

The federal government enacted this GST tax to make sure taxes were paid at each generational level. As with the federal estate tax and gift tax, there is a GST tax exemption, which for this year (2014) is $5,340,000. Once a transferor exceeds this amount, a GST tax is assessed at the flat rate of 40%.

This is just the tip of the iceberg. What has just been explained is the easy part of the GST tax. It becomes much more complicated when you start to explain direct vs. indirect skips, skip persons, and non-skip persons. Many people will never have to worry about the GST tax. This tax can be difficult to navigate, but with the help of a qualified estate planner, it can be accomplished.