GST Tax Events and Skip Person Rules

Who counts as a skip person

A skip person is generally an individual at least two generations below the transferor, such as a grandchild. Generations are counted by family line, and a person without a family tie is classified by age difference.^[3]

A trust is a skip person if all its beneficial interests are held by skip persons, or if no person holds an interest in the trust and no distribution can ever be made to a non-skip person. A beneficiary may have an interest through a present right to income or principal, or because the person is eligible to receive either.^[1]

A deceased parent rule can change a descendant's classification. When the descendant's parent died before the transfer is subject to estate or gift tax, the descendant moves up a generation for that transfer.^[3]

How the three GST events are identified

A generation-skipping transfer is classified as a direct skip, taxable termination, or taxable distribution. The event classification determines who owes the GST tax.^[3]

Direct skips

A direct skip is a transfer subject to estate or gift tax to a skip person. A grandparent's gift directly to a grandchild is a common example. GST exemption is automatically allocated first to direct skips unless the taxpayer elects out.^[1]

Taxable terminations

A taxable termination occurs when a trust interest ends and only skip persons hold interests afterward. The end may result from death, the passage of time, or release of a power. The event is not a taxable termination if only non-skip persons receive the trust property and no skip person has a right to receive it afterward.^[3]

Taxable distributions

A taxable distribution is a trust distribution to a skip person that does not qualify as a direct skip or taxable termination. The recipient is responsible for the tax on a taxable distribution.^[3]

Who owes tax for each event

For a taxable distribution, the recipient pays the GST tax. For a taxable termination, the trustee pays. On a direct skip from a trust, the trustee pays; on other direct skips, the transferor pays.^[3]

Unless the trust instrument specifically assigns GST tax differently, the tax is charged to the property being transferred. For a taxable termination, the taxable amount is the value of the property covered by the termination, less deductions similar to estate administration expenses.^[3]

For U.S. citizens making direct skips above the applicable annual exclusion, all direct skips must be reported on Part 2 of Schedule A of Form 709. Reporting also includes trustee filing for taxable distributions on Form 706-GS(D-1), and recipient filing on Form 706-GS(D).^[1]

Inclusion ratio, exemption, and rate

The inclusion ratio measures the portion of trust property subject to GST tax. First, divide the GST exemption allocated to the trust by the value of the property transferred. Subtract that applicable fraction from one to get the inclusion ratio.^[1]

An inclusion ratio of zero means no portion of the trust interest is subject to GST tax. A ratio of one means the whole interest is subject, while a value between zero and one identifies the taxable percentage.

The GST tax rate equals the estate tax rate of 40 percent for covered transfers, in addition to federal gift and estate tax. Individuals have a GST exemption that can be allocated to transfers.^[2]

GST tax and exemption allocation

An individual may allocate GST exemption to transferred property. An allocation is irrevocable once made, and it affects the trust's inclusion ratio. Allocating sufficient GST exemption to a trust can produce a zero inclusion ratio.^[3][5]

Unused GST exemption is automatically allocated to direct skips unless the taxpayer elects out. Automatic allocation applies for some indirect skips to a GST trust, subject to statutory criteria and an election out, under the historical framework introduced by EGTRRA.^[1]

An estate tax inclusion period can delay allocation to certain split-interest trusts. For example, with a qualified personal residence trust that has a 15-year term, GST exemption cannot be allocated until the term ends. Generally, allocation must wait until the estate tax inclusion period closes when a retained interest would cause estate inclusion. Outside an estate tax inclusion period, a timely allocation generally uses the gift's value for gift tax purposes, while a late allocation generally uses the trust's value on the allocation date, with an election available to use its value on the first day of that month; when an estate tax inclusion period applies, allocation waits until that period ends and uses the property's value then.^[1]

GST exemption may be allocated to assets transferred to a hybrid trust to create a zero inclusion ratio. Distributions from a hybrid trust with that ratio are exempt from GST tax.^[6]

The American Taxpayer Relief Act of 2012 made the federal estate, gift, and GST exemptions permanent, with inflation adjustments. The 2025 tax act (Pub. L. 119-21) then set the basic exclusion amount and the GST exemption at $15,000,000 per person for 2026, with inflation indexing in later years.^[7]

Questions and answers

Related resources

Related glossary terms

• U.S. person: The term can include people and certain domestic entities.

Related articles and guides

• When Trust Transfers Are Completed Gifts: How dominion and control, reserved powers, and retained use, enjoyment, or income relate to completed gifts and estate inclusion for a U.S. citizen's trust.

Tools and official documents

• Form 3520-A: annual information return of a foreign trust: Form 3520-A is a foreign trust's annual information return for a U.S. owner: ownership, annual statements, attachments, related forms and filing timing.

Related pages

• Topic guides
• Allocating GST Exemption to Trust Transfers
• GST Rules for Trust Changes and QPRTs
• Income tax ownership and transfer taxes
• Dynasty trusts and the generation-skipping transfer tax: How dynasty trusts meet the generation-skipping transfer tax: GST events, exemption allocation, inclusion ratios and federal transfer tax reporting rules.