GSTT transfers occur under which circumstance?

• A. Only between family members.
• B. Only between non-family members.
• C. Only when assets aren't subject to gift or estate tax in the middle generation.
• D. Only when assets are subject to gift or estate tax in the middle generation.

Answer: (C)

Generation-skipping transfer tax is charged when wealth is moved to someone two or more generations younger, a skip person, to prevent wealth from escaping the gift or estate tax by skipping a generation. The key condition is that the transfer would not be subject to gift or estate tax in the generation in between the donor and the skip person. In other words, GSTT kicks in only when the middle generation wouldn’t be taxed on that transfer under gift or estate tax rules. If the middle generation would already be taxed on the transfer, it falls under gift/estate tax rules rather than the GST tax. This focus on the middle-generation tax treatment is what defines a GSTT transfer.