Allocating GST Exemption to Trust Transfers

GST exemption allocation applies to a U.S. citizen making lifetime trust transfers. The rules cover allocation timing and value, automatic allocation, the effect of an irrevocable allocation, and qualified severance requirements.

How an allocation is made

A transferor can allocate GST exemption to transferred property, and a lifetime gift allocation is reported on Form 709. Schedule D reports generation-skipping transfers, reconciles GST exemption, and computes the tax. A timely return uses the gift value as finally determined for gift tax and makes the allocation effective on the gift date.^[3]

A late allocation is reported on a Notice of Allocation attached to Form 709. It generally uses the trust's value on the filing date and takes effect then. The allocation record identifies the trust, the year of the reported gift, the value used, the amount allocated, and the resulting inclusion ratio. Regulations allow the late allocation value to be measured on the first day of the filing month if that election is made.^[3]

The difference in valuation can affect how much exemption a transfer uses. For example, a timely allocation against a $5,000,000 gift uses $5,000,000 of exemption. A late allocation uses the trust's value at the time of the late allocation, which will be higher if the trust has grown since the gift. GST exemption generally cannot be allocated to property in which the transferor retains an interest that would cause estate inclusion until the estate tax inclusion period closes.^[3]

Automatic allocation and missed elections

When a taxpayer makes a trust gift but does not affirmatively elect on a timely return, automatic allocation rules may apply and produce a result different from the taxpayer's intent. Form 709 matters even when no gift tax is due because exemption may be automatically allocated to a gift to a GST trust.^[1]^[3]

A late allocation is one route when exemption was not allocated to a trust on the original transfer. A special procedure for certain pre-2001 present-interest annual-exclusion gifts allowed gift returns to be filed as if a timely manual allocation had been made, using transfer-date values. That procedure had its own reporting requirements. Section 9100 relief is available for certain missed regulatory elections, with a request made through an IRS private letter ruling; it generally addresses cases where no election was made.^[2]

Effect of an irrevocable allocation

Once made, a GST exemption allocation is irrevocable. The allocation cannot be undone, and the amount allocated counts in reconciling the transferor's exemption on Schedule D. The allocation's timing and the property value used therefore determine the amount of exemption applied to that transfer.^[3]

Qualified severances

A qualified severance divides a single trust with a mixed inclusion ratio into separate trusts, including one with a zero inclusion ratio and one with a ratio of one. The divided trusts must satisfy the relevant identity requirement, and each receives a fractional share of the original trust's total asset value corresponding to its share before severance.^[2]

The severance must be made under the terms of the governing instrument or under applicable local law, it must be effective under local law, and the resulting trusts must provide, in the aggregate, the same succession of interests to beneficiaries. The trustee establishes the severance date, and funding must occur within 90 days after the effective date. The severance is reported on Form 706-GS(T), which the trustee is responsible for filing.^[2]

Questions and answers

How is GST exemption allocated for a lifetime trust gift?

The allocation is reported on Form 709, with Schedule D used to report generation-skipping transfers and reconcile exemption. A timely return uses the gift's value as finally determined for gift tax and takes effect on the gift date.^[3]

What value applies to a late allocation?

A late allocation generally uses the trust's value on the filing date and takes effect on that date. A filer may elect to use the first day of the filing month for valuation.^[3]

When can automatic allocation apply?

It can apply to direct skips and to transfers to a trust that qualifies as a GST trust. A transfer to a trust that does not qualify receives no automatic allocation, although the transferor can still allocate exemption to it manually.^[2]^[3]

Can a GST exemption allocation be reversed?

No. An allocation is irrevocable once made.^[3]

What conditions apply to a qualified severance?

The severance must be made under the governing instrument or applicable local law, it must be effective under local law, and the separate trusts must provide, in the aggregate, the same succession of beneficiary interests. Assets are divided by fractional value, and funding occurs within 90 days of the effective severance date.^[2]

Who reports a qualified severance, and on what form?

The trustee reports the qualified severance on Form 706-GS(T).^[2]

Related glossary terms

Adverse party: Section 672 defines an adverse party as a person with a substantial beneficial interest in a trust that would be adversely affected by the exercise or nonexercise of a power over the trust.
Grantor: Form 3520 describes a grantor as a person who creates a trust, transfers property to it without full value, or is treated as an owner under specified rules.
Reserved powers: Reserved powers are rights a settlor keeps, or gives to another person, under a trust. Trust laws address their validity and timing, and administration.