A generation skipping transfer (GST) refers to the shift of property by gift or at death to a person who is two or more generations below that of the person granting the gift. The person giving the gift is referred to as the transferor and the recipient is known as the skip person.
Indirect Skips involve transfers that have intermediate steps before reaching a skip person. There are two types of indirect skips, the taxable termination and the taxable distribution.
A taxable termination involves a skip person and a non-skip person. A non-skip person is the primary beneficiary who will receive property before it is transferred to the skip person. The transfer to the skip person takes place upon the death of the non-skip person. Typically, a non-skip person is the child of the transferor. An example of a taxable termination would be a transferor establishing a trust that provides income for his son. Upon the son's death, the remaining property would be passed on to the transferor's granddaughter. The Generation-Skipping Transfer Tax (GST) tax would be paid out of the property when it was passed down to the granddaughter.