The Generation-Skipping Transfer Tax is a federal tax on gifts given to a "skip-person" who is a generation removed from the gift giver.
Previous to the implementation of the Generation-Skipping Transfer Tax, estate's and trusts would gift monies to a grandchild in order to get around the standard estate tax that is in place.
Thus, the Generation-Skipping Transfer Tax was born.
Even if you gift monies to a "skip-person", you still might not be hit by the Generation-Skipping Transfer Tax because their are exemptions depending on the amount that is gifted.
The most recent exemption amount was 2 million dollars. If the gift exceeds this amount then the gift is taxed. The tax percentage varies by year so be sure to check the latest Generation-Skipping Transfer Tax percentages before you gift money to a grand-child.
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