Paralegal Advanced Competency Exam (PACE) Practice Exam

What triggers the Generation Skipping Transfer Tax (GST)?

1. Transfer of property to the donor's spouse

2. Transfer of property to descendants of the donor

3. Passing a trust interest to individuals at least one generation younger

4. The sale of property that is inherited

The correct answer is: Passing a trust interest to individuals at least one generation younger

The Generation Skipping Transfer Tax (GST) is designed to impose a tax on transfers of property that skip generations. The primary trigger for this tax occurs when a donor passes property directly to beneficiaries who are at least one generation younger than themselves. This can include grandchildren or even further descendants, as the tax aims to prevent wealth from being passed down without taxation through multiple generations. In the context of the question, the transfer of interests or property to individuals at least one generation younger (such as grandchildren) is precisely what activates the GST because it bypasses a group of heirs who would typically be subject to transfer taxes. This mechanism ensures that the tax system does not promote the avoidance of estate taxes through strategic wealth transfer that circumvents traditional heirs. Other options provided do not align with the triggering conditions of the GST. For instance, a transfer of property to the donor's spouse typically does not invoke the GST, as there are generally no generation-skipping implications in this scenario. Similarly, transferring property directly to the donor's descendants (children) is also outside the GST's purview, as this does not skip a generation. Lastly, the sale of inherited property does not trigger the GST because it involves a transaction rather than a transfer that skips generations in line