The federal transfer tax system actually includes three taxes, though the third is not as well-known as the gift and estate taxes. The generation skipping transfer tax (GSTT) is designed to capture transfer taxes that might otherwise be avoided through the transfer of assets to a generation at least twice removed from the donor. Grandchildren are the common recipients in a generation-skipping transfer.
The reason for the GST tax is better understood by first considering that the federal treasury counts on capturing estate tax revenue with every successive generation of property owners. If one generation tries to pass property to a "skip person" (i.e., an heir at least two generations removed), the GSTT "replaces" the estate tax that would otherwise be skipped.
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