What does the Generation Skipping Transfer Tax (GSTT) apply to?

The Generation Skipping Transfer Tax (GSTT) specifically applies to transfers made to individuals who are at least two generations younger than the transferor, such as grandchildren or more remote descendants. This tax was established to prevent wealthy individuals from circumventing estate taxes by transferring their wealth directly to grandchildren or other descendants who are further removed in relation to the transferor, thereby avoiding the estate tax liabilities that would apply if these assets passed through each parental generation first.

By imposing taxes on these types of transfers, the GSTT helps ensure that wealth is taxed appropriately across generations, as it allows the tax system to capture the value of the estate that is effectively "skipping" a generation. This mechanism is crucial in estate planning to prevent wealth concentration in fewer family members over time and to maintain fairness in the tax system.

Other options focus on different relationships that do not qualify for the GSTT consideration: transfers to individuals who are only one generation younger than the transferor do not fall under this tax, nor do transfers exclusively to direct descendants or spouses. The focus of the GSTT is distinctly on the generational aspect that involves skipping at least one generation to impose the tax accordingly.