Legal Definitions - direct skip

A direct skip is a specific type of transfer of assets (such as money or property) to a person who is at least two generations younger than the individual making the transfer. This kind of transfer is subject to a special federal tax called the generation-skipping transfer tax (GSTT), which applies in addition to any gift or estate tax that might also be due. The transfer can occur directly to the younger person or indirectly through a trust.

Here are some examples to illustrate a direct skip:

• Example 1: Grandparent's Gift to Grandchild
  A grandmother decides to give a substantial sum of money directly to her granddaughter to help her purchase her first home. The granddaughter is the child of the grandmother's living daughter.

  Explanation: In this scenario, the grandmother is transferring assets to her granddaughter, who is two generations younger. The transfer bypasses the grandmother's daughter's generation entirely. Because the assets go directly from the grandmother to the granddaughter, it is considered a direct skip for tax purposes.

• Example 2: Inheritance Through a Will
  A wealthy individual passes away, and their will specifies that their entire estate is to be distributed to their grandnephew, even though their niece (the grandnephew's parent) is still alive.

  Explanation: The deceased individual is transferring their estate to their grandnephew, who is at least two generations younger (the individual's sibling's child's child). The transfer occurs directly from the deceased's estate to the grandnephew, skipping the niece's generation. This constitutes a direct skip, potentially triggering the generation-skipping transfer tax.

• Example 3: Trust Distribution to a Great-Grandchild
  A great-grandfather establishes a trust and immediately funds it with a significant amount, with instructions for the trust to distribute a portion of that fund directly to his great-grandchild for educational expenses.

  Explanation: Here, the great-grandfather is making a transfer for the benefit of his great-grandchild, who is three generations younger. Even though the transfer is facilitated through a trust, the immediate and direct benefit to the great-grandchild, bypassing the intervening generations (child and grandchild), qualifies it as a direct skip.