Is the Generation-Skipping Tax Exemption Portable?

The Generation-Skipping Transfer (GST) tax is designed to prevent the avoidance of estate taxes across multiple generations. This tax applies to transfers to beneficiaries who are two or more generations younger than the transferor, such as grandchildren or great-grandchildren, often referred to as “skip persons.” The GST tax operates alongside the federal estate and gift taxes, applying a flat rate to transfers exceeding a specific exemption amount. Each individual is provided with a lifetime GST exemption. Understanding how this exemption functions, particularly its transferability between spouses, is key for estate planning.

The Concept of Portability in Estate Planning

Portability refers to the ability of a surviving spouse to utilize any unused portion of their deceased spouse’s federal estate tax exemption. This concept, outlined in Internal Revenue Code Section 2010, allows married couples to maximize the total amount of wealth they can transfer free of federal estate tax. Historically, without portability, the exemption of the first spouse to die might have been partially or entirely wasted if their estate did not fully utilize it.

To elect portability of the Deceased Spousal Unused Exclusion (DSUE) amount, the executor of the deceased spouse’s estate must file a federal estate tax return, Form 706, even if not otherwise required. This election must be made within nine months of the deceased spouse’s death, though an extension can be requested. A simplified method allows for filing Form 706 to elect portability on or before the fifth anniversary of the decedent’s death. Once elected, the DSUE amount is added to the surviving spouse’s own lifetime exemption, allowing for a larger tax-free transfer of assets.

Portability of the Generation-Skipping Transfer Tax Exemption

Unlike the federal estate tax exemption, the Generation-Skipping Transfer (GST) tax exemption is not portable between spouses. Each individual has their own GST exemption. This means that if a deceased spouse did not fully utilize their GST exemption during their lifetime, the unused portion cannot be transferred to the surviving spouse.

This non-portability has significant implications for married couples. The GST exemption is essentially a “use it or lose it” benefit for each spouse. Therefore, careful planning is necessary to ensure that both spouses’ exemptions are utilized to minimize GST tax liabilities on transfers to skip persons. The individual nature of the GST exemption contrasts with the flexibility offered by the portability of the federal estate tax exemption.

Utilizing the Generation-Skipping Transfer Tax Exemption

Given that the GST exemption is not portable, strategic planning is necessary for individuals to maximize its use. One common approach involves making lifetime gifts directly to skip persons, such as grandchildren. By making these gifts, the transferor can apply their available GST exemption to shelter the transfer from the GST tax.

Another effective strategy involves establishing specific types of trusts, often referred to as dynasty trusts or GST-exempt trusts. These irrevocable trusts are designed to hold assets for multiple generations, allowing wealth to grow and pass to future beneficiaries, including skip persons, without being subject to further transfer taxes for as long as the trust endures. The grantor allocates their GST exemption to the assets transferred into these trusts.

For married couples, the “reverse QTIP” election under Internal Revenue Code Section 2652 is a specialized tool to utilize a deceased spouse’s GST exemption with assets in a Qualified Terminable Interest Property (QTIP) trust. While a standard QTIP election treats the surviving spouse as the transferor for estate tax purposes, a reverse QTIP election allows the deceased spouse to remain the transferor for GST tax purposes. This enables the deceased spouse’s GST exemption to be allocated to the QTIP trust property, ensuring that assets passing to skip persons from that trust are protected from GST tax, even though the trust assets will be included in the surviving spouse’s estate for estate tax purposes.