In the past, one way that private landowners could minimize estate taxes was to transfer property to grandchildren instead of children. This way instead of paying taxes on the property when transferred to the children and then again to the grandchildren, taxes would only be paid once.
To fix this loophole, the Internal Revenue Code now applies a generation-skipping transfer tax (GST) to these transfers to make up for what it would have made if it was transferred through each generation.
The tax is applied to transfers made to related individuals that are more than a generation younger than the donor and unrelated individuals that are more than 37.5 years younger than the donor. However, a similar exemption applies to the GST tax as the gifts and estate tax.