Generation-Skipping Transfer Tax (GST)

The generation-skipping transfer tax, usually shortened to GST tax, is a United States federal transfer tax that can apply when property moves to a person two or more generations below the transferor, such as a grandchild, or to certain unrelated younger persons. It works alongside the federal gift and estate tax systems and is designed to limit avoidance of transfer tax at an intervening generation.

GST tax can arise through a direct transfer, a distribution from a trust, or the end of an intervening interest in a trust. These categories have technical names and different reporting mechanics. Whether tax applies depends on the parties, the trust terms, prior transfers, exemption allocation, and current federal law.

Why it matters for family offices

Multi-generational trusts can last for decades, so an error at funding may affect later distributions or termination. Each individual has a GST exemption under United States law, but it is separate in operation from the gift and estate tax exemption and must be tracked carefully. Automatic allocation rules may apply in some cases, while an affirmative election or allocation may be needed in others.

The family office supports US tax advisers by preserving gift documents, trust instruments, valuations, returns, exemption allocations, and the inclusion ratio used to describe a trust's GST tax status. It should not assume that a trust described as a dynasty trust is fully exempt. The result depends on how and when it was funded and administered.

How it shows up in practice

Suppose a grandparent transfers assets to a trust for children and grandchildren. The trust may make discretionary distributions to both generations and continue after the children die. The family office records the transfer date and value, gives the documents to the United States tax adviser, and confirms how the donor's GST exemption is reported and allocated.

Years later, the trustee considers a distribution to a grandchild. Before payment, the adviser reviews the trust's inclusion ratio and history to determine the GST tax treatment and filing requirements. Complete records allow that analysis. Without them, the family may know the trust's current value but not the tax character created when the trust was funded.