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GST inclusion ratio

Key takeaway

The GST inclusion ratio is the excess, if any, of one over the applicable fraction, which generally compares allocated GST exemption with transferred property value after required reductions.

The applicable fraction

Under the general rule, the numerator is the GST exemption allocated to the trust or, for a direct skip, to the property transferred in that skip. The denominator is the transferred property's value after the reductions the statute requires.

A gift to a trust may be subject to gift tax when made and GST tax upon a later distribution, termination, or both. A transfer to a trust does not necessarily trigger GST tax immediately.

Documenting an allocation

Allocating GST exemption to a transfer not reported on the current Form 709, including a late allocation, requires an attached statement titled “Notice of Allocation.” For each trust or other transfer, include:

  • Clear identification of the trust, including its EIN if known.
  • The value of the trust assets at the allocation's effective date.
  • The amount of GST exemption allocated, or an allocation formula.
  • The inclusion ratio after the allocation.
  • For a late allocation, the year the transfer was reported on Form 709.

Timing when an estate tax inclusion period applies

For property subject to an estate tax inclusion period, GST exemption allocation generally takes effect only at the period's close.

For an ETIP transfer reported on Form 709, allocation on a timely gift tax return, including extensions, uses the value at ETIP close. Allocation on a return filed after the due date, including extensions, uses the value at filing.

This filing date valuation rule concerns ETIP transfers, rather than all late allocations. If death closes the ETIP, the executor reports the GST transfer on Form 706.

Information the trustee needs

Under the Form 706 Schedule R instructions, trustees need the trust's inclusion ratio to calculate GST tax on future distributions and terminations. The executor must inform the trustee of the GST exemption allocated to the trust.

The executor need not provide the inclusion ratio or complete column E. The accompanying worksheet calculates an accurate ratio only if the decedent was the sole settlor.

Use a separate worksheet for each trust or each separate share treated as a separate trust.

Annual gift tax exclusion: Qualifying present interest gifts are excluded up to an indexed annual limit per donor, per recipient, per calendar year. Future interests do not qualify, and gifts to a spouse who is not a citizen use a separate, higher limit.

Estate tax inclusion period: An ETIP is the period after a lifetime transfer during which the property's value would be included in the transferor's gross estate if the transferor died. It ends no later than a GST involving the property or the transferor's death, whichever occurs first.

Common questions

Does a spouse's unused estate tax exclusion increase my GST exemption?

No. GST exemption is separate and is not portable between spouses. Its amount equals the basic exclusion amount, so a deceased spouse's unused exclusion does not increase it.

An individual or executor may allocate that individual's GST exemption to property for which the individual is the transferor. Once made, an allocation is irrevocable.

Can GST exemption be allocated automatically?

Yes. On a lifetime direct skip, unused GST exemption is automatically allocated to the extent needed to make the property's inclusion ratio zero, unless the individual elects out for that transfer.

Unused GST exemption is also automatically allocated to lifetime indirect skips to GST trusts unless the individual elects out. That election may cover an indirect skip or any or all transfers to a particular trust.

The estate tax inclusion period timing limitation described above still applies.

Does the annual gift tax exclusion alone protect a direct skip gift to a trust from GST tax?

No. A nontaxable direct skip gift to a trust for an individual remains subject to GST tax unless both beneficiary restrictions are met.

During the beneficiary's life, no trust income or corpus may be distributed to, or for the benefit of, anyone else. If the beneficiary dies before the trust terminates, its assets must be included in that beneficiary's gross estate.

Sources

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