The Generation-Skipping Transfer Tax (GSTT) is a federal tax in the United States that is imposed on certain transfers of wealth that skip a generation. It is designed to prevent individuals from avoiding estate taxes by transferring assets directly to grandchildren or more remote descendants. The GSTT is part of the broader federal transfer tax system, which includes estate tax and gift tax.

Key points about the Generation-Skipping Transfer Tax (GSTT) include:

1. **Purpose:**
– The primary purpose of the GSTT is to ensure that multiple levels of estate taxes are not entirely avoided by transferring assets directly to grandchildren or more remote descendants. Without the GSTT, individuals could potentially skip a generation in transferring assets, thereby avoiding estate taxes at the intermediate generation level.

2. **Applicability:**
– The GSTT applies to transfers made during an individual’s lifetime (gifts) or transfers made at death (through the estate). It also applies to certain trusts that allocate income or principal to beneficiaries more than one generation below the transferor.

3. **Tax Rate:**
– The GSTT is imposed at the maximum federal estate tax rate applicable at the time of the transfer. The maximum federal estate tax rate is 40%.

4. **Exemptions and Exclusions:**
– Like the estate tax and gift tax, the GSTT has exemptions and exclusions. There is a GSTT exemption amount that allows individuals to transfer a certain amount of wealth to skip persons (generally grandchildren) without triggering the tax. The exemption amount is unified with the basic exclusion amount for estate and gift taxes.

5. **Allocation of GSTT Exemption:**
– The GSTT exemption can be allocated to specific transfers during an individual’s lifetime or at death. Allocation of the exemption to a particular transfer shields that transfer from the GSTT. If the exemption is not allocated or is insufficient, the transfer may be subject to the GSTT.

6. **Direct Skips and Taxable Distributions:**
– The GSTT applies to direct skips, where the transferor makes a transfer to a skip person, and taxable distributions from trusts to skip persons. A taxable distribution occurs when a trust allocates income or principal to a skip person.

7. **Automatic Allocation of GSTT Exemption:**
– There are rules for the automatic allocation of the GSTT exemption for certain transfers, such as direct skips and taxable distributions. However, individuals and trustees have the flexibility to make specific allocations based on their planning objectives.

8. **Reporting Requirements:**
– Transfers subject to the GSTT must be reported on the federal gift tax return (Form 709) for lifetime transfers or on the federal estate tax return (Form 706) for transfers at death.

It’s important to note that tax laws are subject to change. Individuals with concerns about estate and gift tax planning, including the GSTT, should consult with tax professionals and legal advisors to ensure compliance with current tax laws and regulations.