In addition to estate and gift taxation, Congress saw fit to add a further layer to the transfer tax system that places a flat 46% tax on "generation skipping" transfers in excess of the Generation-Skipping Transfer (GST) Tax Exemption, which is currently $3,500,000.  The tax is very technical, complicated and widely misunderstood and misapplied.  In general, the tax is of limited concern for couples whose combined estates do not exceed $3.5 million.  Briefly, a generation-skipping transfer is a transfer to a family member two or more generations below  the transferor (e.g. a grandchild) or a transfer to a non-family member that is more than 37 ½ years younger than the transferor.

For those who have large estates and whose children have large estates, generation-skipping transfers present an opportunity to defer, reduce or eliminate the total family estate tax burden. To accomplish this objective, careful estate planning with trusts is an absolute necessity. If you pass more than the exempt amount (whether you intended to or not) to skip persons, the 45% rate will be applied on top the federal and state estate tax rates.  Believe it or not, this can actually result in a 100% tax rate!  Needless to say, you want to avoid this possibility, and you can with proper planning.