The generation skipping transfer tax (“GSTT”) is a tax imposed on outright gifts and transfers in trust to individuals two or more generations below that of the individual making the gift—typically a transfer from a parent to a grandchild either during life or at death.  The tax is in addition to other taxes and, as a result, can significantly increase the cost of the transfer.  Additionally, when the GSTT is applied, the rate is the highest transfer tax rate in existence at the time.

Working with the GSTT requires identifying when it will apply, understanding how to structure a transfer to be as GSTT efficient as possible, and calculating the GSTT results.  Like most planning issues, dealing with the GSTT prospectively is a far superior approach to reacting once a GSTT problem arises.

Incorporating GSTT planning into a general estate plan or wealth transfer transaction can be complicated, but often results in a tremendous benefit.

Dynasty Trusts
One structure that is often used in conjunction with GSTT planning is the dynasty trust.  This is a type of trust that, once it is funded, its assets are forever outside of the transfer tax system.  Some irrevocable life insurance trusts (or ILITs) become dynasty trusts after the payout of a life insurance policy.  However a dynasty trust is funded, the assets are held long-term for multiple future generations.