Best Practice for Allocating GST Exemption to Multiple Trusts

The generation-skipping transfer tax is one of the most complex and often misunderstood parts of estate planning. It was designed to prevent wealth from avoiding transfer tax for an entire generation by moving directly to grandchildren or other skip persons.

The GST tax operates separately from the federal gift and estate tax system. A transfer can therefore be structured properly for gift-tax purposes and still create an unexpected GST problem.

What Is the GST Exemption?

Each taxpayer receives a lifetime generation-skipping transfer tax exemption that can be allocated to qualifying transfers and trusts.

For 2025, the federal GST exemption was $13.99 million per individual. The GST tax rate on taxable generation-skipping transfers can reach 40%.

Beginning in 2026, federal law increased the basic exclusion amount to $15 million, subject to the applicable statutory rules. Because dollar thresholds change, the amount applicable in the year of the transfer must always be confirmed.

Why Allocation Matters

The allocation of GST exemption determines the trust's inclusion ratio.

At a high level:

• An inclusion ratio of zero generally means the trust is fully GST exempt.
• An inclusion ratio of one generally means the trust is fully nonexempt.
• A ratio between zero and one means only part of the trust is GST exempt.

A poor allocation can waste valuable exemption or produce a partially exempt trust that becomes difficult to administer over multiple generations.

The Multiple-Trust Problem

Assume a taxpayer establishes several trusts with different purposes: one may primarily benefit children, another grandchildren, and another may allow distributions across several generations.

Simply allocating GST exemption proportionately to every trust may not produce the best result.

Instead, the analysis should consider:

• The identity and generation of the beneficiaries.
• The probability that property will eventually pass to skip persons.
• The expected growth rate of the assets.
• The distribution provisions of each trust.
• The expected duration of the trust.
• Whether future contributions are anticipated.
• Whether a trust is intended to remain GST exempt permanently.

Consider Fully Exempt and Nonexempt Trusts

Where appropriate, it can be easier to administer a structure in which one trust is deliberately made fully GST exempt while another trust remains nonexempt rather than creating several partially exempt trusts.

This is not always the correct strategy, but separating exempt and nonexempt assets can simplify administration and future tax calculations.

Allocate Exemption to High-Growth Assets Carefully

GST exemption is generally most valuable when it shelters assets expected to appreciate significantly.

If exemption is properly allocated while an asset has a relatively low value, future appreciation can potentially occur inside the GST-exempt structure without requiring an additional allocation of exemption to that appreciation.

This is why valuation and timing can become so important in trust planning.

Automatic Allocation Rules

Internal Revenue Code Section 2632 includes automatic-allocation rules that can apply to certain direct skips and indirect skips.

These rules can prevent an accidental failure to allocate exemption, but they should not be treated as a substitute for reviewing the return.

A taxpayer may also make elections regarding the automatic-allocation rules, including electing out in appropriate circumstances.

Form 709 Is More Than a Gift Tax Return

Form 709 is also an important GST planning document.

When GST exemption is affirmatively allocated, the return should clearly identify the trust and the amount of GST exemption being allocated. Formula allocations may be appropriate in some circumstances.

The return should also be reviewed for elections involving the automatic allocation rules and the trust's resulting inclusion ratio.

Timely vs. Late Allocations

Timing matters because the value used for a GST allocation can differ when an allocation is made late.

A timely allocation generally relates to the value of the transferred property under the applicable rules, while a late allocation may require valuation as of the later allocation date.

If an asset has appreciated significantly, waiting to allocate GST exemption can therefore require substantially more exemption.

Keep a Permanent GST Schedule

For long-term trusts, one of the most important administrative steps is maintaining a permanent record of GST activity.

The file should generally preserve:

• Every Form 709 affecting the trust.
• Notices of Allocation.
• Elections in or out of automatic allocation.
• Valuation reports.
• Dates and amounts of contributions.
• Prior inclusion-ratio calculations.
• Trust agreements and amendments.

Decades later, the trustee or beneficiary may need these records to determine the GST status of a distribution or termination. Reconstructing the history after records have disappeared can be extremely difficult.

Best-Practice Approach

1. Identify every trust receiving a transfer.
2. Determine whether each trust has GST potential.
3. Review the automatic-allocation rules.
4. Determine the family's long-term objectives for each trust.
5. Prioritize exemption for trusts expected to benefit skip persons.
6. Consider expected asset appreciation.
7. Calculate the intended inclusion ratio.
8. Document the allocation and elections clearly on Form 709.
9. Preserve the complete GST history permanently.

The Bottom Line

GST planning should not be reduced to simply entering a number on Form 709.

When multiple trusts are involved, the allocation should be connected to the economic purpose of each trust, the beneficiary structure, expected investment growth and the family's long-term estate plan.

A carefully documented allocation today can prevent substantial tax and administrative problems decades later.