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 sometimes 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, it results in getting the money to the grandchild without the extra round of taxes that would have been imposed had the money first been given to his son and later transferred by him to his son.

Like the estate tax, the generation-skipping transfer (GST) tax had been repealed for 2010. The new law revives the GST tax, with a 0 percent rate for 2010. For 2011 and 2012, the "applicable rate" for GST purposes will be computed based on a maximum estate tax rate of 35 percent. The GST tax exemption amount, which is computed by reference to the estate tax applicable exclusion amount, is $5 million for GSTs occurring after 2009 and before 2013. The $5 million amount is indexed for inflation after 2012.