IRC Section 2601 imposes the federal generation skipping transfer tax on certain transfers that skip a generation, such as gifts or bequests to grandchildren or more remote descendants when a child's generation is bypassed. The GST tax is designed to reinforce the estate and gift tax system by preventing families from avoiding one level of tax through direct transfers to younger generations. Section 2601 applies to direct skips, taxable terminations, and taxable distributions involving skip persons, generally at a flat rate equal to the highest estate tax rate, subject to each transferor's available GST exemption. For life insurance planning, Section 2601 is highly relevant when large policies are owned by dynasty trusts intended to benefit multiple generations or when ILITs are structured to make distributions directly to grandchildren. Advisors must coordinate life insurance leverage, trust design, and GST exemption allocation so that future policy death benefits and trust distributions do not unexpectedly trigger punitive GST tax under Section 2601.

In practice, advisors encounter IRC Section 2601 when affluent clients want to build multigenerational legacy plans using dynasty trusts and survivorship life insurance. A common example is a joint life policy owned by a long term irrevocable trust that will provide education, business capital, and family support to children and grandchildren for decades. Advisors work with attorneys and CPAs to identify which transfers into the trust might be direct skips, whether automatic GST exemption allocation applies, and how much exemption should be affirmatively allocated. They explain that without careful planning, Section 2601 can impose an extra tax layer on top of estate or gift tax whenever trust assets pass to skip persons. Producers who understand 2601 are better equipped to align product recommendations, beneficiary designations, and trust structures with the client's multigenerational goals while minimizing surprise GST liabilities on life insurance funded wealth transfer strategies.