Generation-Skipping Transfer Tax Planning Opportunities Planning to Last Many Lifetimes

By Abbie M.B. Everist, Jack Nuckolls, and Harry Dao

Abbie M.B. Everist is a managing director at BDO in Sioux Falls, South Dakota. She is vice chair of the Section’s Generation-Skipping Transfer Tax Committee. Jack Nuckolls is a managing director at BDO in San Francisco, California. Harry Dao is an associate at McDermott, Will & Emery LLP, located in Menlo Park, California. Harry is an RPTE Fellow.

Generation-skipping transfer (GST) tax planning is vital to preserving taxpayer assets from being subject to multiple levels of tax. The GST tax is a flat 40 percent rate on certain nonexempt assets and distributions and is similar, but imposed in addition, to the federal estate tax. The cumulative effect of federal estate, GST, and potentially state estate or inheritance taxes may greatly diminish family resources for successive generations.

During this period of double unified credit through 2025 under the 2017 Tax Cuts and Jobs Act (2017 TCJA), the opportunity to protect larger amounts of taxpayer assets from additional levels of future taxes is significant. Even if the taxpayer has engaged in considerable estate planning, high engagement should be maintained in this advisory area throughout the taxpayer’s lifetime and even post-mortem, as many planning strategies are available after the exemption is exhausted.

GST Tax

Under US tax laws, every person is granted a gift, estate, and GST tax exemption—to be used during life or at death—that allows the taxpayer to transfer an exempt amount to individuals or trusts free of transfer tax. Under current law, this amount is “unified” so that the exemptions for gift, estate, and GST tax in 2024 are $13.61 million per person for US citizens. I.R.C. (Code) §§ 2010(c), 2505(a), 2631(c). The unified exemption amount is adjusted annually for inflation.

Gift and estate tax exemptions draw from the same $13.61 million. For example, if a taxpayer gifts $5 million, the taxpayer has $8.61 million remaining to use as an exemption for the taxpayer’s gross estate when the taxpayer dies (or it may be ported over to a surviving spouse as a deceased spousal unused exclusion amount). Id. § 2010(c)(4). Any unused GST exemption, however, is not portable to a surviving spouse, so it’s very important to plan to use both spouses’ GST exemptions effectively.

Although the amount of gift, estate, and GST tax exemptions are unified, not all gifts are allocated GST exemption because the transfers may be to non-skip beneficiaries (usually children), which creates a variance between the amount of gift and estate exemption a person may have and the amount of remaining GST exemption. The variance also may go the other way, typically in the case of an irrevocable life insurance trust, whereby premiums are contributed using the annual gift exclusion that don’t qualify for annual GST exclusion, requiring GST exemption to be used if the trust is a GST trust. Id § 2632(c)(3)(B).

Values for exemption purposes are typically based on the date of asset transfer. For example, if a taxpayer gifts $5 million today when the exemption amount is $13.61 million and the taxpayer dies in 2025 with an inflation adjusted exemption of, say, $14 million, the estate will have $9 million worth of exemption to allocate on the estate tax return. This is also true in the inverse. If a taxpayer gifts $13.61 million today, the doubled exemption from the 2017 TCJA sunsets, and the exemption is $8 million in 2026 when the taxpayer dies, in most cases there would be no clawback of the extra exemption that was used during a period of higher exemption. Treas. Reg. § 20.2010-1.

The transferor during life or the executor through an estate may allocate GST exemption to a trust. I.R.C. § 2631. If a transfer to a trust has been allocated GST tax exemption, it is referred to as “exempt,” and if the transfer has not been allocated GST tax exemption, it is referred to as “nonexempt.”

Skip Beneficiaries of a Trust

The GST tax applies to nonexempt generation-skipping transfers, which means a transfer of property by gift or bequest to a “skip person” directly or indirectly through a trust. For a nonexempt trust, GST tax is incurred when:

1. Property is distributed from the trust (other than a trust that was irrevocable on September 25, 1985) to a beneficiary assigned to a generation that is two or more generations below the generation assignment, or for unrelated persons, someone 37.5 years or younger, of the person who transferred the property to the trust by gift or bequest (id. §§ 2611, 2651); or

2. The only beneficiaries of the trust are assigned to a generation that is two or more generations below the generation assignment of the transferor (id. § 2613).

There is also a rule for transfers when the generation below the grantor has predeceased the grantor. In that case, generations will move up a generation, so the grantor’s grandchild from the predeceased child will step into the child’s shoes for GST purposes. Id § 2651(e). This will affect direct gifts to the grandchild or trusts established after the child, or other non-skip person, has passed. If an irrevocable trust that was not previously allocated GST exemption was established before the child predeceased the grantor, however, the grantor may retroactively allocate GST exemption. This is done on a timely filed gift tax return for the year of the child’s death using a date of transfer value with the grantor’s unused GST exemption amount available right before the child’s death. Id. § 2632(d). This is a taxpayer-friendly rule that recognizes that trusts that were expected to be distributed to a child should not be adversely affected because of an untimely death.

Gifts Subject to Tax

Often, a donor will have made previous gifts to children or other non-skip beneficiaries and will have more remaining GST exemption than lifetime gift exemption. It is generally beneficial for a donor to fully use the GST tax exemption by making one or more gifts that would incur gift tax to which unused GST exemption may be allocated. Assuming a gift is made in the amount of the unused GST exemption, the donor would incur a gift tax equal to 40 percent of the excess of the donor’s unused GST exemption over the donor’s remaining lifetime exemption. Despite the immediate tax cost, a lifetime gift often may be more efficient from a wealth transfer perspective than a testamentary bequest because of the ability to shift post-transfer appreciation out of the donor’s gross estate and, assuming the donor survives three years from the date of the gift, the avoidance of estate taxation on the gift tax liability. Id. § 2035(b).

An outright gift to a skip person when the donor does not have remaining GST exemption available will create an immediate GST tax on the transfer. A gift to a trust having non-skip and skip beneficiaries when the donor has no remaining GST exemption will create a nonexempt or a mixed inclusion ratio trust. Planners should proceed with caution when making a gift involving skip persons when the donor has no remaining GST exemption.

Lifetime Allocations and Transfers Without Gift Tax

Although making taxable gifts as part of an estate plan may be beneficial, numerous planning solutions may effectively use GST tax exemption without incurring a gift tax. Most estate plans for families with multigenerational wealth incorporate several strategies for tax efficiency while achieving the donor’s goals.

1. Outright Gifts and Gifts to Trusts

First and foremost, the donor may effectively use GST exemption by transferring growth assets during the donor’s lifetime outright to beneficiaries or to trusts that may hold assets for several future generations. If drafted and administered correctly, this should prevent trust assets from being included in beneficiaries’ gross estates for tax purposes. The selection of the assets to be transferred and the specific terms of the trust receiving the gift revolve around the taxpayer’s goals and objectives. Other factors to consider might be the effect on the taxpayer’s net worth and liquidity needs, restrictions in buy-sell agreements, restrictions in loan covenants, business succession and entity control, and effect on family dynamics.

2. Discounted Assets

One way to leverage the donor’s GST exemption is to transfer assets that are subject to valuation discounts. This normally applies in the context of family business entities, when the interests gifted may be subject to minority and lack of marketability discounts. These discounts apply because the interest transferred does not represent a controlling interest and is not readily marketable. Often, the business may be recapitalized into voting and nonvoting interests so the donor may transfer only the nonvoting interests. Although the valuation discounts provide benefits for gift and GST purposes, care must be taken that the donor not retain powers that may cause estate tax inclusion issues. Id. § 2036.

3. Grantor Trusts

Another opportunity to compound the benefit of using GST exemption with gifts to trusts is to include trust provisions that create a grantor trust for income tax purposes, yet the trust assets remain outside the grantor’s estate for transfer tax purposes. With a grantor trust, the grantor is considered the owner of trust assets for federal income tax purposes. The grantor pays the income tax on the trust’s taxable income. Income tax paid by the grantor on trust income is not considered a gift yet further reduces the grantor’s estate by the amount of income taxes paid. With the grantor paying the trust’s income tax, the trust will grow more rapidly and provide more assets to future generations.

Although this strategy may prove beneficial, consideration must be given to the liquidity of the grantor’s retained assets and their desire to pay income tax on behalf of the trust. The IRS has ruled that if a trust permits an independent trustee (id. § 672(c)) the power, on a discretionary basis, to reimburse the grantor for income taxes paid on behalf of the trust, a concern exists that under the law of some states, such a provision may result in the assets of the trust being included in the grantor’s gross estate. Some states permit trusts to include discretionary reimbursement provisions held by an independent trustee to the grantor for income taxes payable by the grantor on trust income without creating a concern that the grantor’s creditors may gain access to trust assets. This varies widely by state and should not be a prearranged plan of reimbursement between the trustee and grantor or the entire trust may be included in the grantor’s estate. Id. § 2036(a)(1). Taxes that are reimbursed to the grantor eliminate the estate tax benefit of reducing the grantor’s estate by the income tax paid by the grantor on trust income.

Powers that create grantor trust status for income tax purposes may afford additional income tax planning potential. For example, most practitioners include a power of substitution as one of the grantor provisions. Id. § 675(4)(C). Lifetime gifts receive a carryover basis for income tax purposes, yet most assets included in a grantor’s gross estate will receive a basis stepup at death. Id. § 1014. Usually, gifted assets are highly appreciating to remove asset growth from the grantor’s estate. If timed correctly, before the grantor dies, the grantor may exercise the substitution power and swap low-basis assets from the trust with high-basis assets personally owned by the grantor. This allows for a basis step-up on the low basis assets and reduces beneficiaries’ income tax liability when the assets are sold. This strategy requires appropriate timing so as not to put high-growth assets back into the grantor’s estate for too long; it also requires the grantor to personally own substantial high basis assets. If done correctly, though, it affords an opportunity for sizable income tax savings to beneficiaries.

This provides planning opportunities for estate and income tax during the grantor trust period. A grantor trust becomes non-grantor at the earlier of the grantor’s death or the releasing of trust grantor powers (with some exceptions, including spousal lifetime access trusts and life insurance trusts (id. § 677(a)), and some recommended times to avoid releasing powers, including when partnership interests gifted by the grantor have debt in excess of basis (Rev. Rul. 77-402, 1977-2 C.B. 222; Treas. Reg. § 1.1001-2(a)).

4. Purchase of Assets

Estate tax savings also may be realized by leveraging trust assets through the sale of additional assets to an exempt trust using a promissory note. Assuming the trust has been funded for a period of time and has a 10 percent minimum equity to avoid “thin” capitalization, the trustee of the trust may purchase assets with a fair market value up to almost 10 times the initial trust balance by issuing a promissory note in the amount of the purchase price. The promissory note owed by the trust will have an interest rate that may be as low as the applicable federal rate for the term of the note. It is hoped that the purchased assets will have a much higher rate of return. In addition, if the sale occurs between a grantor and the grantor’s wholly-owned grantor trust, the purchase will be disregarded for income tax purposes and will not trigger an income realization event. Rev. Rul. 85-13, 1985-1 C.B. 184.

A riskier technique to leverage the growth of the exempt trust is to have the trustee purchase the appreciation potential of high-performing assets, rather than the assets themselves. For example, if a nonexempt trust is the remainder beneficiary of a grantor retained annuity trust (GRAT) funded with assets that are expected to substantially appreciate during the annuity term, the exempt trust may purchase the GRAT remainder interest from the nonexempt trust. In that case, the exempt trust is not buying the underlying assets from the GRAT but only the potential appreciation thereon during the annuity term. Because of the inherent uncertainties in the future performance of the GRAT assets, the value of the GRAT remainder interest is most likely significantly less than the value of the GRAT assets themselves. David A. Handler & Steven J. Oshins, The GRAT Remainder Sale, 141 Tr. & Est. 33 (2002). Practitioners can potentially achieve even greater leverage by paying the purchase price for the GRAT remainder interest with a promissory note.

With the use of grantor trusts and the grantor’s responsibility for income tax on trust income, this technique also provides cash flow to the grantor to help pay the trust income tax. This may be beneficial for grantors with few liquid assets and that are located in states that do not expressly allow tax reimbursement to the grantor. It’s important to note that promissory note repayment terms should be reasonable based on anticipated income on the assets held in the trust and the ability to repay, so repayment terms may be delayed in a balloon structure that may not necessarily line up with trust income tax liabilities.

The exempt trust also may enter into a derivative contract with either a related party or third parties. David A. Handler & Angelo F. Tiesi, Using Derivatives to “Transfer” Carried Interests in Private Equity, LBO and Venture Capital Funds, 17 Venture Cap. Rev., no. 1, Spring 2006; Ivan Taback & Nathan R. Brown, Estate Planning Ideas for Private Equity Fund Managers, 42 Est. Planning, no. 4, April 2015, at 3. This is usually done in the private equity space and may be able to avoid Code section 2701 partial gift issues that are common when a grantor has various types of ownership interests in a fund.

5. Preferred Freeze Planning

Freeze entities present another interesting opportunity to shift value to exempt trusts. In a typical planning scenario, different parties would create a freeze entity to effect a division among themselves of the economics of the underlying assets in a manner that will provide the preferred equity holder with a more secure, preferred return and priority liquidation right, while giving the potential for residual growth to the common equity holder. N. Todd Angkatavanich & Edward A. Vergara, Preferred Partnership Freezes, Tr. & Est., May 2011, at 20. In exchange for their respective capital contributions, senior family member traditionally would receive the preferred equity interest while junior family members (or a trust for their benefit) would receive the common equity interest. In the prevailing interest rate environment, however, it may be advisable to use a “reverse freeze” structure whereby the junior family members would instead receive the preferred equity interest. Depending on the preferred coupon rate, the payment of the preferred coupon may not only exhaust the return on the entity’s underlying assets but also “cannibalize” even the initial contribution by the common equity holder. In other words, an appropriately-structured freeze entity may allow for a direct transfer of wealth to the exempt trust from either an individual donor or another nonexempt trust. Practitioners must be mindful of Code section 2701 considerations, the interaction of the various attribution and tie-breaking rules, and partnership income tax implications.

GST Transfer Risk

The techniques outlined above entail varying degrees of associated risk. For example, in the case of an asset sale for a promissory note, the IRS may seek to disregard the note as illusory and treat the transfer of the sale assets as a gift to the exempt trust that may change its inclusion ratio or create a taxable gift. Miller v. Comm’r, 71 T.C.M. (CCH) 1674 (T.C. 1996), aff’d, 113 F.3d 1241 (9th Cir. 1997) (enumerating nine factors often examined in determining whether an intra-family loan is bona fide). Accordingly, practitioners must be mindful of the various factors to support the characterization of the promissory note as “real debt.”

It also may be advisable to adequately disclose the sale transaction on a gift tax return to start the running of the statute of limitations, thereby foreclosing potential future challenges by the IRS after the expiration of the applicable period for assessment. Unfortunately, it may not be possible to report a sale transaction between two irrevocable trusts where the transfer of assets simply cannot result in any gift by an individual donor. In that case, the IRS may still challenge the inclusion ratio of the exempt trust until the later of (i) the expiration of the period for assessment with respect to the first GST tax return filed using that inclusion ratio and (ii) the expiration of the period for assessment of federal estate tax with respect to the estate of the transferor even if an estate tax return is not required to be filed. Treas. Reg. § 26.2642-5.

Situs and the Rule Against Perpetuities

The rule against perpetuities (RAP) and trust situs are essential to any conversation regarding GST planning for families with wealth that will outlast a couple of generations; otherwise, trusts may terminate earlier than necessary and bring assets back into descendants’ taxable estates. Historically, most states recognized a RAP that would terminate a trust no later than 21 years after the death of the last life in being when the trust became irrevocable. Many states later incorporated a wait-and-see approach to avoid invalidating a trust from the outset if there was even a remote possibility that the RAP may be violated and allow for a period to see if the trust assets are timely distributed. Since the mid-1980s, numerous states have enacted legislation to allow the creation of dynasty trusts with significantly extended perpetuities periods from hundreds to a thousand years. Some states even abolished the RAP altogether to allow for perpetual trusts. Assets that are owned by dynasty trusts that have been allocated GST exemption by the donor may escape GST tax on any growth or distributions for the duration of the trust. The effect of the tax savings is exponential to legacy wealth families.

1. Annual Exclusion Gifting

• Annual exclusion gifts are a great way to transfer assets to future generations with benefits that accumulate over time. In 2024, in addition to the $13.61 million lifetime exemption, every donor may give each donee $18,000 per year. For example, if a donor is married and has two children and five grandchildren, the donor couple may transfer up to $252,000 in 2024 to their descendants without using any lifetime exemption. Over the course of five years, the donors may transfer $1,260,000 or more (because the exclusion amount is adjusted annually for inflation), plus asset growth that has been removed from the donor’s estate. This translates to a conservative estimated tax savings of over $500,000 without using any lifetime exemption. Below are numerous ways to use GST annual exclusion gifting for skip beneficiaries.

• Outright Gifts. A donor may make gifts outright to a grandchild or a more remote descendant. If the recipient is a minor, the gifts are usually made to a custodial bank or investment account, with the donor or a guardian of the minor able to oversee it. The account will be transferred to the recipient at age 18 or 21, depending on the jurisdiction. Although the donor may manage the investments in the account, the taxation of the income from the account will follow the kiddie-tax rules under Code section 1(g).

• 529 Plans. Qualified tuition plans under Code section 529 provide an opportunity for donors to help with the costs of education for their grandchildren or great-grandchildren. A few of the benefits of these plans are that donors may front-load five years of annual exclusion gifting (although, if they die during that period, a portion will be brought back into their estates); the growth of the investments is not subject to income taxation if used for qualified educational expenses; the owner may change the beneficiary; and funds may be distributed for other uses, subject to a 10 percent penalty. The SECURE Act 2.0 also added the ability to roll over up to $35,000 of a 529 plan into a Roth IRA, limited by certain restrictions. I.R.C. § 529(c)(3)(E). A couple of downsides to 529 plans over other gifting options are the potential 10 percent penalty and possible negative GST tax implications of changing beneficiaries.

• Trust. Annual exclusion gifts also may be made to a properly structured trust. Trusts that qualify for the annual GST exclusion must be for the benefit of a sole beneficiary who is a skip person, no portion of trust income or principal may be distributed to or for the benefit of anyone other than the beneficiary, and the trust must either terminate during the beneficiary’s lifetime or be included in the beneficiary’s estate. Id. § 2642(c)(2). These trusts must either be a minor exclusion trust until age 21 under Code section 2503(c) or satisfy the present interest requirements with withdrawal rights under Code section 2503(b); however, the limited duration of a Code section 2503(c) trust, unless the beneficiary chooses to extend the trust period, makes these far less common. Using a trust for annual exclusion gifting provides the donor flexibility in deciding the purposes for which distributions may be made to the beneficiary, commonly health, education, maintenance, and support, and possibly for home acquisition assistance or business investments.

• Roth IRA. If the grandchild has earned income, a Roth IRA may be opened on the grandchild’s behalf with contributions up to the greater of their earned income for the year or $7,000, the annual limit for 2024. Id. § 408A(c)(2). Distributions from Roth IRAs are generally free from income tax if a withdrawal is of a contribution or is a qualifying distribution. Id. § 408A(d). Since $7,000 is below the $18,000 annual gift exclusion, this option may be used in conjunction with other methods discussed.

2. Payment of Educational or Medical Expenses

A donor may pay for qualifying educational and medical expenses on behalf of a beneficiary without using any of the donor’s estate, gift, and GST exemption or annual gift exclusion. Under Code section 2503(e), to be eligible, the expenses must be paid by the donor directly to the education or health care provider. The donor may not give the beneficiary the funds to in turn pay for the educational and medical expenses. In addition, not all expenses qualify for the exclusion. For educational purposes, qualified expenses are tuition payments and do not include books, supplies, room, or board. Treas. Reg. § 1.2503-6(b)(2). By contrast, medical expenses are broadly defined as “expenses incurred for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body or for transportation primarily for and essential to medical care,” as long as the expenses are not reimbursed by insurance. Id. § 1.2503-6(b)(3). With the rising costs of education and health care, this may be a great way for donors to significantly reduce their estates, and most donors favor helping beneficiaries with these types of expenses.

3. Late Allocation of GST Exemption

Another way to use an unused GST exemption is to make a late allocation of GST exemption on a gift return to an existing trust that has an inclusion ratio greater than zero of which the taxpayer is the transferor for GST tax purposes. Id. § 26.2632-1(b)(4). Code section 2642(b)(3) provides that the inclusion ratio of the trust will be determined based on the trust value on the date the late allocation is filed with the IRS, and the allocation is effective from that date forward. Treasury Regulation § 26.2642-2(a)(2), however, allows taxpayers to elect to value the trust property as of the first day of the month in which the late allocation is filed. This election often is necessary in the case of hard-to-value assets that cannot be immediately appraised on the date of filing of the late allocation.

A late allocation presents a particularly interesting planning opportunity in the case of a market downturn. If the value of the trust assets declines after the date of contribution, less GST exemption may need to be allocated to achieve a zero-inclusion ratio. As an example, assume the donor funded a trust with $1,000,000 on January 1, 2022. The extended deadline for filing the gift tax return reporting this gift is October 16, 2023. Because of a market downturn, the trust assets have significantly depreciated before the tax filing date. To reduce the amount of GST exemption that the donor needs to allocate for the trust to have a zeroinclusion ratio, the donor should file two separate gift tax returns. First, on a timely-filed 2022 gift tax return, the donor should make the opt-out election under Code section 2632(c)(5)(A)(i) not to have Code section 2632(c)(1) apply to the initial transfer to the trust. Then, on another return filed after October 16, 2023, the donor affirmatively allocates GST exemption equal to the value of the trust assets on the date of filing the late allocation. The taxpayer essentially avoided allocating GST exemption to the diminution in the trust value between the date of initial funding and the date of the late allocation. If the trust value on the date of late allocation is $600,000, the donor needed to allocate only $600,000 of GST exemption for the trust to have a zero-inclusion ratio, as opposed to $1,000,000 had the automatic allocation rule applied. Note that this is only for GST purposes and the full $1,000,000 gift exemption will have been used.

The late allocation must actually be late, so it cannot be filed before the due date for filing the gift tax return reporting the initial gift, including any applicable extension. If the IRS extends the filing deadline because of natural disasters or other emergencies, that additional time should be taken into account to determine the first date when the late allocation may be filed. Even if a gift tax return is already filed to report the initial gift, the donor may still file another return on or before the filing deadline to supersede the original return and make any necessary opt-out election to enable a subsequent late allocation. I.R.S. Gen. Couns. Mem. 202026002 (June 26, 2020).

4. GST Planning with Trusts Funded by Earlier Generations

Nonexempt trust assets often are included in the gross estate of trust beneficiaries who are non-skip persons (such as the donor’s children) because of a general power of appointment granted to the beneficiaries, whether under the trust terms or by an independent trustee’s exercise of discretion. I.R.C. § 2041(a)(2). A GST planning strategy with these trust assets may be to distribute assets to such beneficiaries, who may then fund new exempt trusts using their own lifetime gift and GST exemptions. This is tax-efficient, as the same assets would otherwise be included in the beneficiaries’ gross estate, and by gifting now the beneficiaries may not only take advantage of the double exemption available through 2025 but also remove future growth on those assets from their estate. Even if the assets of a nonexempt trust are not subject to inclusion in any beneficiary’s gross estate, the enormous effect of GST tax from taxable terminations and taxable distributions should still be analyzed to see if there is a way to minimize the potential multiple levels of GST tax. This may potentially be achieved through an independent trustee exercising broad discretionary distribution authority.

5. Lifetime QTIP

Another GST planning technique that does not incur a gift tax is to allocate GST exemption to a lifetime transfer that qualifies for the marital deduction. This strategy would require the creation of an inter vivos qualified terminable interest trust (QTIP) that qualifies for the marital deduction. The donor would need to make a lifetime QTIP election under Code section 2523(f) for gift tax purposes and the reverse QTIP election under Code section 2652(a)(3) (B) for GST tax purposes.

This strategy is viable only for an individual who is married to a US citizen and may not be the most efficient solution from a wealth transfer standpoint because of the requirements under Code section 2523(f). The QTIP needs to distribute all its net income to the donor’s spouse at least annually (which income, however, may be reduced through the use of a “spigot” holding structure that minimizes income generation). In addition, upon the death of the donor’s spouse, the QTIP will be includible in the spouse’s gross estate. Id. § 2044(b)(1)(B). This means that any post-transfer appreciation may still be subject to estate taxation. Moreover, because the transfer is considered a gift to the donor’s spouse, a split-gift election under Code section 2513 will not be available.

6. Qualified Severance

If a trust has a mixed inclusion ratio, the best structure may be to sever the trust into GST exempt and GST nonexempt shares pursuant to regulatory requirements. Treas. Reg. § 26.2642-6(d). This allows the trustee to prioritize distributions from the nonexempt portion to non-skip beneficiaries, which would be subject to GST tax if distributed to skip persons, and make distributions from the GST exempt share to skip beneficiaries.

Post-Mortem Planning

Fortunately, there may be some postmortem GST planning opportunities, too. One option is allocating GST on Form 706, Schedule R, to avoid deemed allocation rules. This allows the executor to allocate GST exemption to trusts that may be subject to future GST tax. Otherwise, the deemed allocation rules would have the decedent’s remaining exemption allocated pro rata among assets based on value, first to direct skips, then to nonexempt trusts with possible skip beneficiaries. Id. § 26.2632-1(d)(2).

Another option may be to use a reverse QTIP election on Form 706, Schedule R. Since any remaining GST exemption is not portable to a surviving spouse, the election may allocate the remaining GST exemption, or portion thereof, to a QTIP trust for the ultimate benefit of skip beneficiaries. Id. § 26.2652-2.

A third post-mortem GST planning possibility involves the surviving spouse’s ability to disclaim part of the spouse’s interests in a decedent’s estate or revocable trust. This method is highly dependent on the testamentary document provisions and who the beneficiaries are if the disclaimant is treated as being predeceased because the disclaimant may not direct where the disclaimed assets pass. Id. § 25.2518-2(a)(5). It is also important to comply with the technical requirements of a qualified disclaimer: The disclaimer must be in writing, irrevocable, and made within nine months of the interest being created or the disclaimant’s turning 21, and the disclaimant may not have received any benefit from the disclaimed assets. Id. § 25.2518-2. An effective qualified disclaimer will not use the disclaimant’s gift tax exemption and will, it is hoped, allow more of the decedent’s GST exemption to be allocated to estate assets.

Conclusion

Thoughtfully incorporating GST exemption strategies into an estate plan provides for tax-effective outcomes for families with multigenerational wealth. The GST tax rules are complex and require numerous professionals working together to achieve the grantor’s goals, along with tax and risk reduction. As discussed in this article, there are many planning options available that generally result in favorable outcomes if timely executed.