Which transactions are subject to the Generation-Skipping Transfer Tax (GSTT)?

The Generation-Skipping Transfer Tax (GSTT) is a federal tax that applies to certain transfers of property made to individuals who are more than one generation below the transferor, such as grandchildren. The tax is intended to prevent individuals from avoiding estate tax liability by skipping generations in their estate planning.

The correct answer encompasses three main types of transactions that are subject to GSTT: taxable terminations, taxable distributions, and direct skips.

Taxable distributions refer to distributions from a trust to a skip person (which is often a grandchild) that exceed the available annual exclusion amount. This is where the transfer is made directly from the trust to the skip person, and such transfers can be taxed under the GSTT.

Direct skips involve a transfer of property directly to a skip person that is not held in a trust. This transfer is subjected to the tax at the time the gift is made and can trigger GSTT liabilities.

Taxable terminations occur when a trust terminates, and the assets are distributed to skip persons. If the assets of the trust are subsequently distributed to those individuals who are more than one generation beneath the grantor, it qualifies as a taxable termination and is also subject to GSTT.

Including all three categories—taxable term