Legal Definitions - generation-skipping transfer

A generation-skipping transfer refers to the act of giving or bequeathing assets (such as money, property, or investments) to an individual who is at least two generations younger than the person making the transfer.

This type of transfer is specifically identified by tax law because it "skips" an intermediate generation that would typically incur estate or gift taxes. To prevent the avoidance of these taxes, such transfers are subject to a special federal tax called the Generation-Skipping Transfer Tax (GSTT). Essentially, if you transfer assets to someone who is more than one generation removed from you (e.g., your grandchild, or a grand-niece/nephew), it is considered a generation-skipping transfer.

Here are some examples to illustrate this concept:

• Example 1: Great-Aunt's Bequest to Grand-Niece

  An elderly great-aunt, who has no children of her own, decides to leave a substantial portion of her estate directly to her grand-niece in her will. The grand-niece is the daughter of the great-aunt's niece.

  How it illustrates the term: The great-aunt is two generations older than her grand-niece. The transfer bypasses the intermediate generation (the great-aunt's niece, who is the grand-niece's mother) that would typically receive an inheritance first. This direct bequest to a recipient two generations younger constitutes a generation-skipping transfer.

• Example 2: Entrepreneur's Trust for a Young Protégé

  A successful entrepreneur, aged 70, establishes a trust to fund the college education and initial career expenses of a brilliant young intern, aged 25, who is not related to him. The trust is designed to distribute funds directly to the intern over several years.

  How it illustrates the term: Although there is no familial relationship, the intern is significantly more than one generation younger than the entrepreneur (a difference of 45 years). This direct transfer of substantial assets through a trust to someone so much younger, effectively bypassing the generation that would typically be the entrepreneur's children or direct heirs, qualifies as a generation-skipping transfer.

• Example 3: Family Trust for Distant Relatives' Grandchildren

  A wealthy individual creates a complex family trust that specifies that a portion of the assets will be distributed directly to the grandchildren of their second cousin, completely bypassing the second cousin's children (who are the individual's first cousins once removed).

  How it illustrates the term: The individual is making a transfer to people who are two generations removed from their second cousin, and therefore also two generations removed from themselves in terms of typical inheritance patterns. By directing funds to the second cousin's grandchildren and skipping over the second cousin's children, this arrangement is classified as a generation-skipping transfer.