How GST exemption is allocated to trusts

GST exemption is separate from estate and gift tax exclusion

Each individual has a separate GST exemption that the individual or executor may allocate to property for which that individual is the transferor. Allocations are irrevocable.

The exemption amount equals the basic exclusion amount. A deceased spouse's unused exclusion does not increase it.

Automatic allocation applies differently to direct and indirect skips

On a lifetime direct skip, unused GST exemption is allocated automatically to the extent needed to make the inclusion ratio zero, unless the transferor elects out.

Unused exemption also allocates automatically to lifetime indirect skips, meaning transfers to statutory GST trusts, unless the transferor elects out. Transfers subject to an estate tax inclusion period follow the closing rules below.

Electing out of allocation to a lifetime direct skip

To prevent automatic allocation, describe the transfer and the extent of nonallocation on Form 709. File by the deadline for reporting the transfer as a taxable gift, including extensions actually granted.

Alternatively, a timely Form 709 accompanied by payment of the reported direct skip GST tax prevents automatic allocation. Direct skips subject to an estate tax inclusion period use special closing rules.

Otherwise, Form 709 need not be filed merely to report an automatic allocation.

Making an affirmative allocation on Form 709

An affirmative lifetime allocation other than a direct skip is made on Form 709. Identify the trust and the amount of GST exemption allocated.

If the allocation is late or claims an inclusion ratio above zero, also report trust asset values at the allocation's effective date. The allocation should state the resulting inclusion ratio.

The allocation applies to the entire trust rather than selected assets. An allocation to a trust without GST potential is void, although even a remote possibility establishes GST potential.

An allocation exceeding the amount needed for a zero inclusion ratio is generally void to that extent. This limit does not apply to charitable lead annuity trusts or allocations made before an estate tax inclusion period ends.

Timely and late allocations use different dates

A timely lifetime allocation generally uses the finally determined gift tax value and takes effect from the transfer. Timeliness depends on the return deadline for that particular transfer.

A return filed on time for another gift can still make a late allocation for an earlier transfer.

An ordinary late allocation uses trust asset value on its effective date and takes effect when Form 709 is filed. It precedes taxable events occurring on that filing date and is irrevocable when made.

For this purpose, filing is determined by the postmark to the IRS address prescribed in forms or other IRS guidance. The monthly valuation election and estate tax inclusion period rules below provide separate treatment.

The first day of the filing month changes valuation only

A late lifetime allocation may elect to use trust asset value on the first day of the filing month. Form 709 must state that the election is made, the valuation date and fair market value on that date.

The allocation still becomes effective only when actually filed with the IRS. The election is unavailable for a life insurance policy, or a trust holding one, if the insured has died.

An estate tax inclusion period controls allocation effectiveness

If any part of a trust is subject to an estate tax inclusion period, the entire trust is subject to it.

An affirmative allocation made before the period closes cannot be revoked and takes effect at closing. An allocation made by the Form 709 deadline for a lifetime closing year can also take effect at closing.

Automatic direct and indirect skips subject to the period are deemed made at closing. An allocation deemed made at closing uses the value at that time.

A period ending because of the transferor's death follows the separate death allocation rules.

Common questions

Can an individual allocate exemption through the estate return deadline?

Yes. An individual may allocate GST exemption through the estate tax return deadline, including extensions, even if no estate return is required.

That outer deadline does not make a late lifetime allocation timely for valuation or effectiveness. The timely, late and ETIP rules above still govern.

Does the gift tax exclusion alone settle GST treatment for a trust gift?

No. Nontaxable gift treatment under the GST inclusion ratio rules generally requires exclusion under section 2503(b), after gift splitting, or section 2503(e), plus both additional trust conditions.

During the beneficiary's life, distributions may benefit only that beneficiary. Trust assets must be included in that beneficiary's gross estate if the beneficiary dies before the trust terminates.

Does portability increase a surviving spouse's GST exemption?

No. The GST exemption is tied to the basic exclusion amount, so a deceased spouse's unused exclusion does not add to it.