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The U.S. generation-skipping transfer tax (a.k.a. "GST tax") imposes a tax on both outright gifts and transfers in trust to or for the benefit of unrelated persons who are more than 37.5 years younger than the donor or to related persons more than one generation younger than the donor, such as grandchildren. These people are known as "skip persons." In most cases where a trust is involved, the GST tax will be imposed only if the transfer avoids incurring a gift or estate tax at each generation level.
Assume, for example, a donor transfers property in a trust for the donor's child and grandchildren and that during the child's lifetime, the trustee may distribute income among the child and grandchildren in accordance with their needs. Assume further that the trust instrument provides that the remaining principal of the trust will be distributed outright to the grandchildren following the child's death. If the trust property is not subject to estate tax at the child's death (by reason of a general power of appointment, e.g.), a GST tax will be imposed when the child dies. This is called a "taxable termination." In that case, the trustee is responsible for filing a GST tax return and paying the tax. On the other hand, a "taxable distribution" occurs if the trustee distributes income or principal to a grandchild before the trust terminates. In that case, the beneficiary is responsible for paying the tax. These taxable events are sometimes overlooked by people who may be unaware of the existence of the tax or its application to their situation. See IRS Forms 706 GS (D-1)) and 706 GS(T).