GST Late Allocations During Life: Notices, Where to File, and More

Deciphering the timing of GST allocations

Table of Contents

1. Background, and a Bonus Question

2. Late Allocation Defined

3. Retroactive Allocation, and Available GST Exemption

4. Valuation Rules

5. What and Where to File

6. The Six-Month Grace Period

7. Conclusion (with Summary Illustration)

Background, and a Bonus Question

In prior articles on the generation-skipping transfer (GST) tax, we have discussed how timing is an important aspect of the GST tax. This is usually an issue where trusts are concerned,[1] because (1) there is no GST tax until a benefit goes to a skip person, and (2) you cannot determine with numerical certainty the benefit going to a skip person from a trust (if non-skip persons are also present beneficiaries) unless or until there is a taxable termination, taxable distribution, or change in transferor accompanied by a direct skip.

This creates an issue in determining the GST potential of a trust. Keep in mind that the ticket to entry here is a transfer to a trust, where such transfer is itself subject to gift or estate tax. Since a trust may not have beneficiaries who are skip persons at the time of such transfer, the GST tax rules and regulations give us options to determine whether and when GST exemption might be allocated. Sometimes, a delay may be mandated – such as where a transfer is subject to an estate tax inclusion period. Other times, a delay may be optional through an election to treat a trust as a GST trust (ensuring automatic allocation where the trust otherwise would not qualify).

However, this question of timing is often a value play. Only an allocation on a timely-filed Form 709 can use the gift tax value for purposes of determining how much GST exemption is used to achieve our ultimate goal – a GST tax inclusion ratio of zero. Recall that this zero inclusion ratio is accomplished by achieving a dollar-for-dollar allocation of GST exemption as compared to the value (as computed for gift or estate tax purposes) of transfers to the trust. Does that mean, for example, that we must use the gift tax value as reported on Form 709 for purposes of an allocation? Or, for example, could we wait if (1) we’re not sure when or if skip persons will benefit from the trust, and (2) we’re not sure if the value of the trust asset might go down, as might be the case for an asset such as term life insurance.

This question will become an important one in coming years, as increasing numbers of people elect not to have children. While giving such choice the respect and sensitivity it deserves, this article is about the practical question of when GST tax exemption might be best deployed along with values to be used, and limits on when the maximum GST exemption is determined.

To that end, we will explore at a high level the late allocation of GST exemption during life. In a subsequent article, we will explore automatic allocations at death (which themselves can technically be “late” allocations). In the process, we will answer a bonus question regarding where late allocations should be filed.

Late Allocation Defined

Generally, if Form 709 (with extensions) is even one day late, the opportunity to allocate GST exemption based on the values reported on that Form 709 is lost unless automatic allocation applies to the transfer. But in order for automatic allocation to apply, the trust needs to either be a direct skip trust (where the current interests are held solely by skip persons) or a GST trust as defined in IRC Section 2632(c)(3)(B).