Legal Definitions - generation skipping

"Generation skipping" refers to a legal strategy or action where an individual, typically a grandparent, transfers assets or makes a gift directly to a grandchild or another beneficiary who is two or more generations younger, intentionally bypassing the intervening generation (such as the grandchild's parent).

While historically employed as a method to potentially reduce or defer federal estate and gift taxes, such transfers are now subject to a specific federal levy known as the Generation-Skipping Transfer Tax (GSTT). This tax is designed to ensure that transfers across multiple generations do not escape taxation that would otherwise apply if the assets were passed down sequentially through each generation.

• Example 1: Educational Trust Fund

  A wealthy grandmother establishes a trust fund specifically for her granddaughter's college and graduate school expenses. The trust document states that the funds are to be managed by a trustee and disbursed directly to the granddaughter for educational purposes, completely bypassing the granddaughter's mother (the grandmother's daughter).

  This illustrates generation skipping because the grandmother is transferring assets (money for education) directly to her granddaughter, who is two generations younger, without the funds first passing through or being controlled by her daughter. This direct transfer to a skip person triggers the generation-skipping transfer tax rules.

• Example 2: Direct Real Estate Gift

  A grandfather owns a cherished vacation home that he wants to ensure stays in the family. Instead of leaving it to his son, he decides to deed the property directly to his grandson, who has always loved spending summers there, as a gift for his 30th birthday.

  Here, the grandfather is engaging in generation skipping by transferring the vacation home directly to his grandson, bypassing his son. The grandson is two generations removed from the grandfather. This direct gift of real estate would be subject to the generation-skipping transfer tax in addition to any applicable gift tax, as it skips the intermediate generation.

• Example 3: Will Provision for Inheritance

  An elderly woman updates her will to include a specific provision. Instead of leaving her entire estate to her two children, she designates a substantial portion of her investment portfolio to be divided equally among her five grandchildren upon her passing. Her children will receive the remaining portion of the estate.

  This scenario demonstrates generation skipping within a will. The grandmother is directing a significant part of her inheritance directly to her grandchildren, effectively bypassing her children for that specific portion of her estate. This testamentary transfer (transfer through a will) to beneficiaries two generations younger would also be subject to the generation-skipping transfer tax rules.