Generation-skipping transfer tax refers to the tax created in 1976 that applies to gifts made through trusts to family members and others who are a generation younger than the creator of the trust. Before the generation-skipping transfer tax, well off individuals could make gifts or bequests to their grandkids and other younger individuals to avoid estate and gift taxes that otherwise would apply. The generation-skipping transfer tax closed this loophole by taxing these kinds of transfers similarly to other large gifts and bequests. Now, generation-skipping transfers above the applicable exclusion amount are taxed at the highest rate that apply to other transfers. In 2022, a 40% generation-skipping transfer tax applies to amounts above $12,060,000 gifted to individuals 37 ½ years younger than the creator of the trust. While this tax covers most large transfers to younger generations, individuals can still create dynasty trusts which may avoid all gift taxes and the generation-skipping tax when transferred to younger generations.
[Last updated in January of 2022 by the Wex Definitions Team]