IRC 2631: Generation-Skipping Transfer Tax Exemption

Internal Revenue Code (IRC) Section 2631 provides an exemption from the Generation-Skipping Transfer (GST) tax. This provision allows individuals to transfer wealth to distant generations, such as grandchildren or beyond, without incurring an additional layer of federal tax. The exemption is a tool for preserving family assets across multiple generations.

Defining the Generation-Skipping Transfer Tax

The Generation-Skipping Transfer (GST) tax is a federal tax on property transfers to individuals significantly younger than the transferor. It ensures wealth is taxed at each generational level, preventing the bypass of estate and gift taxes for one or more generations. The tax is levied at a flat rate equal to the highest federal estate tax rate at the time of the transfer.

A “skip person” is the recipient of a generation-skipping transfer. For relatives, this is someone two or more generations younger than the transferor, like a grandchild. For non-relatives, a skip person is an individual more than 37.5 years younger than the transferor. A “non-skip person” is anyone who does not meet this definition, such as a child.

A “Direct Skip” is an outright transfer of property made during the transferor’s lifetime or at death to a skip person. For example, a gift from a grandparent to a grandchild that exceeds the annual gift tax exclusion is a direct skip. The transferor is responsible for paying any resulting GST tax.

A “Taxable Distribution” occurs when a distribution of income or principal is made from a trust to a skip person. If a trust benefits both a child and a grandchild, any distribution to the grandchild is a taxable distribution. The recipient, in this case the grandchild, is liable for paying the GST tax.

A “Taxable Termination” happens when a non-skip person’s interest in a trust ends, and the property is then held for or distributed to a skip person. For example, a trust provides income to a child for life, with the remainder passing to grandchildren upon the child’s death. The end of the child’s interest triggers the GST tax, and the trustee is responsible for payment.

The Lifetime GST Exemption

Section 2631 grants every individual a lifetime exemption from the GST tax, allowing them to shield assets from this tax when transferring them to skip persons. The lifetime GST exemption amount is adjusted annually for inflation and aligns with the federal estate and gift tax exemption.

Each person holds their own GST exemption. Spouses can elect to “split” gifts made to third parties, treating a transfer by one spouse as if made one-half by each. This allows them to use both of their GST exemptions for a single transfer.

A significant distinction between the GST exemption and the federal estate tax exemption is the concept of portability. The estate tax exemption is “portable,” meaning a surviving spouse can use any unused portion of their deceased spouse’s exemption. The GST exemption, however, is not portable. If an individual does not use their entire GST exemption during their lifetime or at their death, the unused portion is lost and cannot be transferred to the surviving spouse.

The current high exemption amounts are a result of the Tax Cuts and Jobs Act of 2017, but these provisions are scheduled to expire at the end of 2025. Without new legislation, the exemption amount is expected to revert to its pre-2017 level of approximately $5 million, adjusted for inflation.

Information and Decisions for Allocating the Exemption

Managing the Generation-Skipping Transfer (GST) exemption involves understanding both automatic allocation rules and making deliberate choices. The Internal Revenue Code provides default rules for how the exemption is applied, but taxpayers can make specific elections to override these defaults. These decisions are documented on the U.S. Gift (and Generation-Skipping Transfer) Tax Return, Form 709.

The IRS has automatic allocation rules for the GST exemption. The exemption is automatically applied first to any “direct skips” made during the taxpayer’s lifetime to the extent needed to result in no GST tax. Any remaining exemption is then automatically allocated to transfers made to “GST trusts,” which are likely to have future generation-skipping transfers.

Taxpayers have the right to elect out of these automatic allocation rules. For example, a transferor might create a trust that benefits both children (non-skip persons) and grandchildren (skip persons) but anticipates that most distributions will go to the children. In this scenario, automatically allocating the GST exemption to this trust might be an inefficient use of the exemption. By electing out, the transferor preserves the exemption for other transfers that are certain to be generation-skipping, such as a direct gift to a grandchild.

To make these elections on Form 709, the transferor needs the precise value of the transferred property and the trust’s Employer Identification Number (EIN), if applicable. These elections must be made on a timely filed return. The choice to opt out of automatic allocation for a trust transfer is made by checking a box on the form and attaching a statement identifying the transfer and the election.

To affirmatively allocate the exemption, the transferor uses the appropriate schedule on Form 709 to detail the transfers and specify the amount of GST exemption for each. A “Notice of Allocation” statement can be attached to the return to provide a clear record of how the exemption is used. This documentation helps track the remaining exemption.

Filing Procedures for GST Exemption Allocation

The deadline for filing Form 709 is generally April 15th of the year following the year the gift was made, aligning with the due date for individual income tax returns. An extension to file an income tax return automatically extends the deadline to file Form 709 to October 15th. If an income tax extension is not needed, a taxpayer can file a separate form to request a six-month extension for Form 709.

The completed Form 709 can be filed electronically or mailed to the IRS service center listed in the form’s instructions. An extension to file is not an extension to pay any gift or GST tax due. Tax liabilities must be paid by the original April 15th deadline to avoid penalties and interest.

Procedural remedies are available for making a late allocation if an oversight occurs. Final regulations from 2024 established an updated process for requesting an extension of time for a late GST exemption allocation. To obtain relief, the taxpayer must show the IRS they acted reasonably and in good faith and that the request will not prejudice the government’s interests. This streamlined procedure is the primary method for correcting missed allocations and often does not require a Private Letter Ruling.