How to Make the 2632(c) Election on Form 709

The Generation-Skipping Transfer (GST) tax is a federal tax on wealth passed to individuals who are two or more generations younger than the donor, such as a grandchild. To mitigate this tax, each person has a lifetime GST exemption to shield these transfers from the tax. This exemption is managed and reported to the Internal Revenue Service (IRS) using Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. This article focuses on the elections available on Form 709 for managing the automatic allocation of the GST exemption.

Understanding GST Tax Automatic Allocation Rules

The Internal Revenue Code automatically allocates a donor’s GST exemption to certain transfers to protect taxpayers from unexpected GST tax liability. The rules primarily target “indirect skips,” which are transfers to a trust that could result in a future generation-skipping transfer, like a later distribution to a grandchild. These automatic allocation rules apply specifically to transfers made to a “GST trust.”

A trust is considered a GST trust if a generation-skipping transfer could occur with respect to the donor. Broadly, if a trust could have a beneficiary who is a “skip person” (e.g., a grandchild), it is likely a GST trust. For any transfers made to a trust that fits this definition, the law automatically applies the donor’s available GST exemption to the transfer. This is done to the extent necessary to make the inclusion ratio zero, making the transfer exempt from future GST tax.

This automatic allocation is the default mechanism and happens without any action from the taxpayer. While beneficial, it may not align with an individual’s estate planning goals because it reduces the available exemption. A taxpayer might prefer to use that exemption for other, more certain generation-skipping transfers, making it necessary to override the default with an election on Form 709.

Information and Decisions for the 2632(c) Election

Before completing Form 709, a taxpayer must make strategic decisions regarding their GST exemption. These decisions revolve around the elections available under Internal Revenue Code Section 2632(c), which allow a taxpayer to modify the automatic allocation rules.

One election is to opt out of the automatic allocation for a specific transfer. A taxpayer might choose this path if the assets transferred to a trust are unlikely to be distributed to a skip person. For example, if the primary beneficiaries are the donor’s children and a distribution to a grandchild is a remote possibility, using the GST exemption could be inefficient. By electing out, the donor preserves their exemption for a future transfer that is a certain generation-skipping event, such as a direct gift to a grandchild.

Conversely, a taxpayer can elect to treat a trust as a GST trust. This election is useful when a trust’s terms do not meet the statutory definition of a GST trust, but the donor wants the automatic allocation rules to apply. This ensures that any transfers to this trust will automatically be covered by the GST exemption, providing certainty and simplifying future tax compliance.

To execute either of these elections, the following information is necessary:

• The trust’s legal name and its taxpayer identification number (TIN)
• A copy of the trust instrument to confirm its status
• The exact date and fair market value of the property transferred to the trust
• An accounting of the remaining lifetime GST exemption before the current transfer

Making the Election on Form 709

To alter the automatic allocation of the GST exemption, the election must be properly reported on Form 709. The gift itself is reported on Schedule A, Part 1 of the form. The allocation of the GST exemption is tracked on Schedule D, Part 1, “GST Exemption Reconciliation.” However, the specific election is not made by simply checking a box on the main form.

Making the election requires preparing a separate statement that is attached to the filed Form 709. This statement must clearly articulate the election being made and identify the specific transfers and trusts involved.

An example of language for electing out would be: “The taxpayer, [Taxpayer’s Name], hereby elects under Internal Revenue Code Section 2632(c) to not have the automatic GST exemption allocation rules apply to the transfer of [Asset Description and Value] made on [Date] to the [Name of Trust], EIN [Trust’s EIN].” A statement to treat a trust as a GST trust must similarly identify the trust and state the election being made. This attachment must be clearly labeled and securely fastened to the tax return.

Filing Form 709 and Post-Filing Expectations

After preparing Form 709 and any necessary attachments, the return must be filed with the IRS. The filing deadline is April 15 of the year following the year in which the gift was made. If a taxpayer files for an extension for their individual income tax return, the due date for Form 709 is also extended to October 15. A key rule is that an election to opt out of automatic allocation cannot be made on a late-filed Form 709.

The mailing address for filing Form 709 depends on whether a payment is included with the return. Filers should verify the correct address in the current Form 709 instructions before mailing. Using a trackable mailing service is recommended to have proof of the filing date.

Once the return is filed, the IRS will process it. The taxpayer might receive a notice from the IRS if the return is incomplete or selected for review. Keeping a complete copy of the filed Form 709 and all attachments is an important record-keeping practice.

For those who realize they missed making a necessary election on a timely filed return, specific Treasury Regulations provide a path to request an extension of time. Recent guidance has clarified that these requests now follow a dedicated procedure. Obtaining this relief can be complex and is not guaranteed.