Generation-Skipping Tax: What It Is and How to Avoid It

The estate tax is one of the most hated taxes in the U.S. tax code, especially among those who are wealthy enough to have to pay it. Many wealthy families have used complex strategies involving wealth transfers to grandchildren, great-grandchildren, and other remote descendants in order to avoid paying estate taxes generation after generation. In response, Congress created the generation-skipping transfer tax, also known as the generation-skipping tax or GSTT, to close the perceived loophole.

What generation-skipping tax does
The idea behind the GSTT is pretty simple. The general concept of the estate tax hinges on the assumption that most people leave money to their spouses first, then to children, then to grandchildren and more remote descendants. The estate tax grants an unlimited deduction for marital gifts, but when assets move down to the children’s generation, tax is usually collected. Later, when the child dies, those assets subsequently go to grandchildren, with the IRS collecting another round of estate taxes. […]