United States
Hong KongThe generation-skipping transfer tax, and why it exists
A flat additional tax at the top transfer tax rate on gifts and bequests to a skip person - someone two or more generations below the transferor. The exemption equals the basic exclusion amount and is not portable.
A tax with one purpose: preventing wealth from passing down two generations while paying transfer tax once.
The problem it solves
Leave property to a child and it is taxed at your death and again at theirs. Leave it directly to a grandchild and, without this tax, it would be taxed once.
The generation-skipping transfer tax closes that, at a flat rate equal to the top transfer tax rate - 40 per cent - and it applies in addition to any gift or estate tax.
Who is a skip person
- A lineal descendant two or more generations below the transferor - a grandchild or great-grandchild.
- An unrelated individual more than 37 and a half years younger than the transferor.
- A trust in which all interests are held by skip persons.
The 37 and a half years figure is genuinely in the statute and is a favorite recall question.
The predeceased ancestor exception moves a grandchild up a generation where their parent - the transferor's child - has already died, so they are no longer a skip person.
The three types of transfer
| Type | What it is |
|---|---|
| Direct skip | An outright transfer to a skip person |
| Taxable termination | An interest in a trust ends, leaving only skip persons with interests |
| Taxable distribution | A distribution from a trust to a skip person that is not a direct skip or termination |
Who pays differs by type. On a direct skip the transferor pays; on a taxable distribution the recipient does; on a taxable termination the trustee does. That allocation is examinable.
Unlike the estate tax exclusion, the GST exemption cannot be transferred to a surviving spouse. A couple wanting to benefit grandchildren needs to use each exemption during life or at the first death, which is a significant argument for a trust over portability.
The exemption
Equal to the basic exclusion amount - USD 15 million in 2026 - and allocated to transfers to shelter them from the tax.
Allocation can be automatic or elective. Allocating it to a trust expected to grow substantially shelters all future appreciation, which is the mechanism behind dynasty trusts in states permitting long or perpetual trust durations.
What is excluded
Annual exclusion gifts to a skip person, subject to conditions where a trust is involved. Direct payments of tuition and medical expenses, exactly as for gift tax.
So a grandparent paying a grandchild's tuition directly avoids gift tax and generation-skipping tax at once, which makes it one of the most efficient transfers available.
The transfer tax exclusion was changed by the 2025 reconciliation act and is indexed thereafter. Confirm the current figure before relying on it, and check state law separately.
Common questions
What is the generation-skipping transfer tax?
A flat additional tax at the top transfer tax rate of 40 per cent on transfers to a skip person, in addition to any gift or estate tax.
Who is a skip person?
A lineal descendant two or more generations below the transferor, an unrelated person more than 37 and a half years younger, or a trust in which all interests are held by skip persons.
What is the predeceased ancestor exception?
Where a grandchild's parent - the transferor's child - has already died, the grandchild moves up a generation and is no longer a skip person.
Is the GST exemption portable?
No, unlike the estate tax exclusion. A couple wanting to benefit grandchildren must use each exemption during life or at the first death, which favors a trust over portability.
Is paying a grandchild's tuition subject to GST tax?
No, where paid directly to the institution. It is excluded from both gift tax and generation-skipping tax, making it one of the most efficient transfers available.