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.
Under the GST, you could give up to $3.5 million in 2009 to your grandchildren (in total, not to each) without triggering the tax. Anything above that would be subject to the GST. In 2010, neither the GST nor the estate tax applies to transfers to which they normally apply. Under current law, the taxes return in 2011, when the $3.5 million exclusion amount reverts to only $1 million. If Congress acts during 2010, the taxes may come back into effect during 2010, perhaps retroactively to the beginning of the year.