Left alone, a wealthy family could dodge a round of estate tax by leaving property to grandchildren instead of children, skipping the generation where tax would otherwise be collected. The generation-skipping transfer tax closes that door, applying on top of gift or estate tax when property moves to a skip person — a grandchild, a remoter descendant, or someone sufficiently younger than you.
It reaches transfers in several forms: an outright gift or bequest to a skip person, a distribution from a trust to one, and the moment a trust's non-skip beneficiaries all drop away leaving only skip beneficiaries behind. That last form catches people out, because nothing visible happens at that instant — the taxable event is structural rather than an act anyone performs.
There is a separate GST exemption that shelters a substantial amount from the tax, and allocating it correctly is where most of the technical work lies. The exemption amount and the applicable rate are set by law and change, so treat any figure you see as provisional and confirm the current position with a tax professional before acting on it.
For nearly everyone this is a non-issue, since the exemption is well beyond the size of a typical estate. It becomes relevant for larger estates and for anyone using long-term trusts intended to serve multiple generations. If you are contemplating a dynasty trust or leaving significant assets directly to grandchildren, this belongs in the conversation with your attorney from the start.