What Is a 2632(c) Election for GST Exemption?

The Generation-Skipping Transfer (GST) tax is a federal tax on the transfer of property to a person two or more generations younger than the donor, such as a grandchild. To prevent families from avoiding estate taxes by gifting assets directly to younger generations, this tax is imposed at the highest federal estate tax rate, which is 40%. Each individual has a lifetime GST exemption, an amount that can be transferred without incurring this tax; for 2025, this amount is $13.99 million.

The Internal Revenue Code (IRC) provides default rules for how this exemption is automatically applied to certain gifts made to trusts. These rules were designed to simplify compliance and prevent accidental taxation, but they may not align with every person’s specific estate planning goals. This article explains the default rules and the specific elections available under IRC Section 2632(c) that allow a taxpayer to control the allocation of their GST exemption.

The Default Automatic Allocation Rule

The tax code automatically allocates a donor’s GST exemption to certain lifetime transfers, known as “indirect skips,” to prevent unintended tax consequences. An indirect skip is a transfer of property to a “GST trust,” a specific type of trust subject to gift tax that is not a direct transfer to a grandchild or other “skip person.” This automatic allocation ensures the trust is shielded from future GST tax.

A trust is generally considered a GST trust if there is a possibility that a generation-skipping transfer could occur in the future with respect to the person making the gift. The tax code provides specific criteria for what constitutes a GST trust, but broadly, it is any trust that could benefit a skip person. For example, if a donor creates a trust for the benefit of their child, and upon the child’s death the remaining assets pass to their grandchildren, this would likely be classified as a GST trust.

When a donor makes a gift to a trust that meets this definition, the law automatically applies as much of the donor’s unused GST exemption as needed to make the trust fully exempt from the GST tax. This allocation occurs whether or not a gift tax return is filed. The purpose is to protect taxpayers who might not be aware of the need to affirmatively allocate their exemption to such a trust. Without this rule, a future distribution to a grandchild from the trust could be subject to the GST tax.

Electing Out of Automatic Allocation

A taxpayer can choose to prevent the automatic allocation of their GST exemption to transfers made to a specific trust. This is accomplished by making an election under Section 2632(c) of the Internal Revenue Code. This “election out” tells the IRS not to use the donor’s GST exemption for a particular transfer or for all future transfers to a designated trust, thereby preserving the exemption for other uses.

One of the primary reasons for electing out is to avoid wasting the GST exemption on a trust where a generation-skipping transfer is unlikely. Consider a trust established primarily for the benefit of a child, a non-skip person, with only a remote possibility that assets will ever pass to a grandchild. If the automatic rules were to apply, a portion of the donor’s GST exemption would be allocated to this trust, even though it may never be needed. By electing out, the donor retains that exemption to use for a different trust specifically designed to benefit grandchildren or for another strategic transfer in the future.

Another common scenario involves trusts that are not intended to be generation-skipping vehicles, such as certain types of annuity trusts (GRATs). In these cases, applying the GST exemption would be an inefficient use of a limited resource. The election provides the flexibility to direct the exemption to transfers where it will have the most impact, such as a dynasty trust intended to last for multiple generations.

Electing Into Automatic Allocation

While less common, a taxpayer can also make an election to treat a trust as a GST trust, even if it does not meet the technical definition. This election, also made under IRC Section 2632(c), forces the automatic allocation rules to apply to transfers made to the trust. It is used in specific circumstances to ensure GST exemption is applied where it otherwise would not be.

This “election in” is useful for trusts that might fail one of the specific exceptions that prevent a trust from being classified as a GST trust, but which the donor fully intends to be a generation-skipping vehicle. For instance, a trust might be structured in a way that a portion of the assets could be included in a non-skip person’s estate under certain conditions, technically disqualifying it as a GST trust. If the donor’s goal is for this trust to be GST exempt, the automatic allocation rules would not apply by default.

By making this election, the donor ensures that any transfers to the trust will automatically receive an allocation of the GST exemption, shielding it from future GST tax without the need for manual allocation on each gift tax return. This helps the trust function as intended for future generations, even if its technical drafting places it outside the standard definition of a GST trust.

How to Make the Elections on Form 709

Both the election to opt out of automatic allocation and the election to treat a trust as a GST trust are made on a timely filed Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. The election is effective for transfers made during the calendar year covered by the return. The process requires a specific statement to be attached to the Form 709.

The attached statement must clearly identify that the taxpayer is making an election under Section 2632(c), specify the trust by name and identification number, and describe the transfers to which the election applies. For an election out, the taxpayer can state whether the election applies to a single, current-year transfer or to all future transfers to that trust. To elect in, the statement must explicitly state that the donor is electing to have the trust treated as a GST trust.