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Generation-Skipping Transfer Tax

Estate owners can often reduce death taxes by skipping a generation of heirs; e.g., bypass their children or give the children only a right to income for their lifetime with the remainder passing to their grandchildren.

Under prior law, when a child died under such an arrangement, the assets were not subject to federal estate tax and therefore a generation of death taxes was skipped.

In order to reduce the loss of this tax in larger estates, Congress enacted the generation-skipping transfer tax in 1976. This very complex law was repealed in 1986 but was replaced with a similar law set forth in IRC Secs. 2601-2663.

Two Common Types Of Transfers
•    Generation-sharing transfers: The transferor (e.g., grandparent) typically places assets in a trust which pays income to his or her child for life, and then the remainder passes to grandchildren after the child is deceased.
•    Direct generation skip: The transferor bypasses his or her children and gives the asset either directly to the grandchildren or a trust for their benefit.

Exempt Transfer

Each transferor has a $1,030,0001 exemption which can be allocated between gifts made during his or her lifetime and transfers made at time of death.

Rate Of Tax

Generation-skipping transfers which exceed the exemptions, shown above, will be subject to the maximum estate and gift tax rate of 55%. This tax is in addition to the federal estate and gift tax and is reported on IRS Forms 706GS(D), 706GS(T), or 709. Treas. Reg. 26.2662-1.

Reducing The Impact Of The Generation-Skipping Transfer Tax
•    Married couples should consider a three-trust plan. The first spouse to die could divide his or her $1,030,000 GST exemption' between a credit shelter trust (usually the amount of assets equivalent to the unified credit) and a QTIP GST exempt trust. The remaining assets could pass to a QTIP nonexempt GST trust.
•    Consider making full use of the annual gift tax exclusion of $10,0002 to any number of donees; e.g., children, grandchildren, in-laws, etc.

1 For calendar year 2000. This amount will be indexed for inflation in future years. 2 The annual exclusion is indexed for inflation after 1998.

* Encourage children or grandchildren (or trusts for their benefit) to purchase and own large life insurance policies on the parent or grandparent. At death, the insurance proceeds would not generally be subject to federal estate tax or the generation-skipping transfer tax.

Note:    In order to keep the assets of an irrevocable life insurance trust from being subject to the generation-skipping transfer tax, care must be taken to see that transfers (after 3/31/88) to the trust by the insured qualify for the annual exclusion and that the insured correctly allocates part of his or her $1,030,000 exemption to each transfer.


The generation- skipping transfer tax is a very complex area of the law. Documents must be carefully drafted to avoid this tax in larger estates. For more information, examine IRS Forms 706 GS(D), (D-1), and (T) and their instructions.