What are the IRS rules on GST exemption allocations on gift tax returns?


Quick Answer

Retroactive allocations of generation-skipping tax exemptions, or GSTs, need to be made on a gift tax return filed on or before April 15 of the year following the death of the individual being skipped, according to the IRS. The value of this allocation is retroactively made effective immediately before the death in question.

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Full Answer

Special rules apply to certain allocations of GST exemptions, according to Cornell University Law School. In the case of a GST transfer that produces an unused GST exemption sum, the IRS requires that the unused sum be allocated first to property of the deceased individual, and second to any trusts to which the individual might make a posthumous taxable distribution or termination.

Cornell University Law School clarifies that there are two types of skips that generation-skipping tax exemptions can apply to: indirect skips and direct skips. An indirect skip is a transfer of property, subject to Chapter 12 taxation, made to a trust instrument with more than 25 percent of its corpus distributable to non-skip individuals, who are living on the date of death of the individual identified in the trust instrument.

Whether a direct or indirect skip is allocated, should the GST exemption produce an unused portion, the inclusion rate for the property being transferred must feature an inclusion rate of zero, according to Cornell University Law School. After this sum is reached, the rest may be allocated to the transferred property.

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