How to Allocate the Generation-Skipping Tax Exemption

The federal government imposes a Generation-Skipping Transfer (GST) tax on transfers of wealth to beneficiaries who are at least two generations younger than the donor. It is a separate levy, applied in addition to any federal gift or estate tax, and is calculated at the highest prevailing estate tax rate of 40 percent. To mitigate this, the tax code provides each individual with a lifetime GST exemption.

For 2025, the GST exemption amount is $13.99 million per person. This figure is indexed for inflation and represents the total value of generation-skipping transfers an individual can make during their lifetime or at death without incurring the GST tax. Using the exemption allows wealth to pass to later generations more efficiently.

Understanding Exemption Allocation

The Internal Revenue Code has default rules for applying the GST exemption, known as automatic allocation. These rules automatically assign a portion of the donor’s available exemption to cover transfers classified as “direct skips” or “indirect skips.” This system applies unless the donor chooses a different course of action.

A direct skip is a transfer subject to gift or estate tax made to a “skip person,” most commonly a grandchild or a trust exclusively benefiting grandchildren. When a donor makes an outright gift to a grandchild, the law automatically allocates enough of the donor’s GST exemption to make the transfer non-taxable for GST purposes without requiring specific action from the donor.

An indirect skip involves a transfer to a trust that is not a direct skip but from which a generation-skipping transfer could be made later. These are often called “GST trusts,” such as a trust that benefits both a child and a grandchild. The automatic allocation rules apply to contributions to these trusts, shielding future distributions to the grandchild from the tax.

A taxpayer can override these default provisions through elections on a timely filed gift tax return. A donor can “elect out” of the automatic allocation for a transfer. This may be done to preserve the GST exemption for a different asset that is expected to appreciate more significantly over time, thereby maximizing the value of the exemption.

A donor can also make a “manual allocation” of the exemption. This is used to direct the exemption to specific transfers or trusts that do not fall under the automatic allocation rules. For example, if a trust is not technically a “GST trust” under the tax code’s definitions, the donor must manually allocate the exemption to protect its assets from future GST tax.

Required Information for Filing

To report GST exemption allocations, a donor must use Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. The donor’s full name, address, and taxpayer identification number (typically a Social Security number) are required.

Information about the recipient of the gift is also required. If the transfer is a direct gift to an individual, their name and address are needed. If the transfer is made to a trust, the trust’s legal name, address, and its Employer Identification Number (EIN) must be provided. A detailed description of the property being transferred is also necessary. For publicly traded securities, this includes the number of shares and the CUSIP number; for real estate, a legal description and physical address are needed.

The fair market value of the property on the date of the transfer must be determined and reported. For securities, this value is the mean between the highest and lowest selling prices on the gift date. All gifts are reported on Schedule A of Form 709, which is where the donor lists each gift, its date, the donee’s information, and its value.

To elect out of an automatic allocation, a statement must be attached to the return that identifies the transfer and states the donor is electing out of the automatic allocation rules. For a manual allocation, the donor attaches a statement detailing the transfer and the amount of exemption being applied. This allocation is then reported on Schedule D of the form, creating a formal record of how the exemption was used.

The Filing Process for Allocation Elections

Once Form 709 is completed, it must be filed with the Internal Revenue Service. The standard filing deadline for this annual return is April 15th of the year following the gift. This deadline aligns with the due date for individual income tax returns.

An extension for filing Form 709 is possible. A six-month extension to October 15th is granted if the taxpayer files Form 4868 to extend their individual income tax return. If an income tax extension is not being filed, a donor can file Form 8892, Application for Automatic Extension of Time To File Form 709, to request the same extension. An extension to file does not extend the time to pay any gift tax that may be due.

The completed Form 709 cannot be filed electronically and must be mailed. The mailing address is specified in the official instructions for Form 709 and is typically directed to an IRS service center in Kansas City, Missouri. The exact address may vary depending on whether a payment is included, so consulting the most current instructions is advised.

After mailing, the donor should retain a complete copy of the filed Form 709 and any attached statements indefinitely. This document serves as the official record of how much lifetime GST exemption has been used. This record is essential for tracking the remaining exemption for future gifts and for preparing the donor’s estate tax return.