The federal generation skipping transfer tax is an extremely complicated system meant to fill what was once a gap between the federal estate tax and the federal gift tax, which were meant to levy tax on substantial wealth transferred between generations.
By the normal order of things, this meant that the estate tax would apply to each generation. For example, Father, by will, gives Son $2,000,000; at his death, the Son gives the $2,000,000 to Grandson (his son). The tax collector would assess tax when Father transferred the money to Son, and again when Son transferred the money to Grandson.)
Before the enactment of the GST tax, extremely wealthy individuals (usually those having a net worth of several million dollars) would sometime set up a bequest like this: During his lifetime, or in his will, Richard Bigbucks gives his grandchild $10,000,000. Although this bequest would be subject to the federal estate or gift tax, Richard has managed to get the money to the grandchild without the extra round of taxes that would have been collected had the money first been given to his son, Farnsworth, and then transferred by him to his son (don't cry for Farnsworth too much; he undoubtedly was provided for by way of other transfers!).
Under the GST, you can give up to $1,060,000 (in 2001) to your grandchildren
(in total, not $1,060,000 to each) without triggering the tax. Anything above
that would be subject to the GST. Looking ahead, the amount of the GST tax
exemption for any calendar year will be equal to the estate tax exclusion amount
in effect for that year (e.g. $1 million for 2002-2003 and $1.5 million for