Racing Off Into the SunsetRacing Off Into the Sunset
Timing considerations for late allocations of GST tax exemption before 2026.
As most wealth advisors are aware, the increases in the basic exclusion amount for gift and estate tax purposes1 and the generation-skipping transfer (GST) tax exemption amount2 under the Tax Cuts and Jobs Act of 20173 (the TCJA) expire on Dec. 31, 2025.4 Although all facets of federal wealth transfer tax planning are important, GST planning for the TCJA sunset can be highly technical and sometimes overlooked. In recent years, high-net-worth individuals may have created irrevocable trusts and funded them using their gift and estate tax exclusion amounts, but may not have allocated GST tax exemption amounts to these trusts for various reasons. Additionally, individuals who exhausted their gift and estate tax exclusion and GST tax exemption amounts in the early days of the TCJA may have significant exclusion and exemption amounts remaining given the substantial inflation adjustments to the basic exclusion amount over the last few years.5
Late allocations of GST tax exemption to GST non-exempt or partially exempt trusts offer individuals the opportunity to use the TCJA-era increase in the GST tax exemption amount and may be especially attractive for those unable or unwilling to make further lifetime gifts. It’s critical, however, for these individuals and their advisors to be aware that, without postponement of the sunset by subsequent legislation or guidance or additional relief from the Internal Revenue Service, they would be required to structure, execute and report these late allocations on or before Dec. 31, 2025. Although this time constraint may be obvious as a conceptual matter, it raises several practical issues, especially with respect to reporting, that advisors should be prepared to address as we approach 2026.
Suitable Trusts for Late Allocation
Although trusts that are GST non-exempt or partially exempt may have such status for a variety of reasons, they’re typically suitable as targets for late allocations of GST tax exemption. In connection with prior estate planning, individuals may have intentionally elected out of automatic allocation of GST tax exemption6 to trusts created for limited purposes, such as irrevocable life insurance trusts holding term, rather than whole life, policies or trusts subject to estate tax inclusion periods,7 such as grantor retained annuity trusts (GRATs).
Conversely, an individual may have failed to elect out of automatic allocation of GST tax exemption to a trust otherwise subject to the automatic allocation rules and inadvertently caused a trust to be partially exempt from GST tax. This is occasionally seen in practice with GRATs, when at the expiration of the annuity period (that is, the close of the estate tax inclusion period) the individual’s GST tax exemption is automatically allocated to the fullest extent possible to the entire value of the property passing to the GRAT’s remainder trust. If the value of such property exceeds the amount of the individual’s available GST tax exemption, the remainder trust will have a “mixed” inclusion ratio,8 causing the property to be partially exempt from GST tax.
For trusts that are wholly non-exempt from GST tax, if an individual’s available GST tax exemption equals or exceeds the value of the trust property at the time the late allocation is made, the trust can be made wholly exempt from GST tax. (See below for a complete discussion of late allocations of GST tax exemption.) If the available GST tax exemption is less than the value of the trust property at the time the late allocation is made, the individual could consider a “qualified severance”9 of the trust into two shares, with the first share having a value equal to the individual’s available GST tax exemption amount and the second share having a value equal to the balance of the trust property. The late allocation would be made as of the date of the qualified severance to the first share, which would be treated as a separate trust for GST tax purposes thereafter.10 For trusts that are partially exempt from GST tax, the need for a qualified severance in addition to a late allocation would depend on the trust’s “applicable fraction”11 and the value of the trust’s assets as compared to the individual’s available GST tax exemption at the time of the late allocation.
Even without regard to their tax attributes, existing trusts may be unsuitable targets for GST tax exemption allocation for other reasons, such as outdated dispositive terms or inflexible fiduciary appointment provisions. An individual not positioned to create and fund a wholly new trust, either because of an unwillingness to give away additional assets or prior exhaustion of the gift and estate tax exclusion amount, may find that existing trusts are the best option, even if the late allocation must be coupled with a qualified severance to ensure that the resulting trusts are wholly GST-exempt or non-exempt.
Late Allocation Procedure
Late allocations require attention to technical rules that account for the delay between the initial transfer to the trust and the subsequent allocation of GST tax exemption in an amount different from the value of the initial transfer. A late allocation of GST tax exemption is generally made on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return that identifies “the trust to which the allocation is being made, the amount of GST exemption allocated to it, and if the allocation is late ..., the value of the trust assets at the effective date of the allocation” and “should also state the inclusion ratio of the trust after the allocation.”12 With certain exceptions, allocation of GST tax exemption may be made by a formula, such as being expressed in terms “of the amount necessary to produce an inclusion ratio of zero.”13 The most recent instructions to Form 709 require the filer to attach a “Notice of Allocation” stating the foregoing information and the trust’s employer identification number if known.14
The effective date of a late allocation is generally the date on which Form 709 is filed, with Form 709 deemed to be filed on the date it’s postmarked to the IRS.15 A late allocation to a trust may be made on a Form 709 that’s timely filed with respect to another transfer.16 However, solely for purposes of determining the fair market value (FMV) of the trust assets, a transferor may elect to treat a late allocation as having been made on the first day of the month during which the late allocation is made.17 Such election is made by stating on the Form 709 on which the allocation is made: (1) that the election is being made; (2) the applicable valuation date; and (3) the FMV of the trust assets on the valuation date.18 An allocation subject to such election isn’t effective until it’s filed with the IRS.19
The practical import of these technical rules is that a late allocation of GST tax exemption is typically made “as of” the first day of a month in which the transferor already intends to file
Form 709 reporting other transfers. For example, a transferor wishing to make a late allocation of GST tax exemption to a trust this year might have done so by filing a 2023 Form 709 (otherwise reporting transfers made in 2023) during the month of March 2024 and electing March 1, 2024 as the date when trust assets would be valued for purposes of the late allocation.
Issues in 2025
The procedures described above work well in the “trailing” example when a late allocation is made on a Form 709 that would have been filed anyway to timely report transfers made in the prior calendar year. Individuals desiring to make late allocations of GST tax exemption in 2025, however, are under much greater time pressure to do so. As described above, a late allocation is effective when Form 709, making the late allocation, is filed (that is, postmarked), subject to the election to value assets as of the first day of the month in which filing occurs. As of Jan. 1, 2026, however, each taxpayer’s GST tax exemption amount will be reset to an inflation-adjusted $5 million, eliminating the increase in the GST tax exemption amount and the individual’s ability to make a late allocation on or after such date.20 Accordingly, based on the Treasury regulations applicable to late allocations and absent legislation postponing or eliminating the TCJA sunset or guidance or additional relief from the IRS, an individual wishing to make a late allocation of the TCJA-era GST tax exemption amount, including its anticipated apex in 2025, must do so by filing Form 709, making such late allocation on or before Dec. 31, 2025.21
This timing constraint raises several issues. First, Form 709 and its instructions generally don’t include references to the applicable exclusion amount or GST tax exemption amount currently in effect for the year in which the form is filed by the taxpayer, because it’s typically filed the year after the year in which transfers reported on the form are made. A taxpayer’s late allocation of current year GST tax exemption on a Form 709 designed for use in the prior year may cause the Form to become internally inconsistent, particularly on Schedule D, Part 2, where the taxpayer is instructed to insert both the current year GST tax exemption amount (Line 1) and amounts allocated to transfers not shown on the form (that is, those late allocated on a “Notice of Allocation,” Line 6).22 The current year GST tax exemption is that amount determined for the year in which the transfers that are being reported were made, even though GST tax exemption exceeding this amount would be reflected on the form’s GST reconciliation table.
To address the discrepancy in GST tax exemption amounts, an individual might consider filing a Form 709 that’s blank except for the individual’s identifying information and the Notice of Allocation attached to report the late allocation. For example, in 2025, a 2024 Form 709 would be filed solely to report a late allocation made in 2025, perhaps to take advantage of a favorable (that is, low) valuation environment for the trust property to which GST tax exemption is allocated. Then, later in 2025, the individual would file a second 2024 Form 709 to report ordinary course transfers made in 2024. Absent additional guidance from the IRS, which could be included on the 2024 version of Form 709 or found on a “standalone” form specially designed as a vehicle for individuals to report late allocations in 2025 in an internally consistent manner, this two-step process may cause confusion not only at the time of filings but also in the future when the individual, fiduciaries or advisors need to determine the GST status of the transferred property.
Second, and somewhat ironically, taxpayers seeking to make a late allocation of GST tax exemption in 2025 would need to do so on a Form 709 filed before the deadline for filing a Form 709 reporting timely allocations to transfers made in 2025. A Form 709 reporting transfers made in 2025 wouldn’t ordinarily be required to be filed until April 15, 2026, subject to further extension.23 The precise amount of GST tax exemption available for the late allocation may be known with reasonable certainty if the transfers to which GST tax exemption is expected to be timely allocated in 2025 consist of easily valued property, such as cash or marketable securities. However, even if the amounts of GST tax exemption late and timely allocated are known, the out-of-sequence reporting may cause confusion on multiple fronts and should be carefully considered and documented. Guidance from the IRS similar to that described above, or additional relief, which might include an extension for reporting late allocations of GST tax exemption made in 2025 to the regular deadline for filing the 2025 Form 709, would help to mitigate potential confusion.
Third, and reminiscent of other years in which taxpayer-favorable provisions expire, the need to make late allocations of TCJA-era GST tax exemption amounts before the end of 2025, coupled with attention to using the benefits of other sunsetting provisions, may overwhelm attorneys, accountants and valuation experts, leading to potential errors. Even if these advisors have made diligent efforts to ensure that their clients have allocated as much GST tax exemption as possible, the final inflation adjustment increase in the GST tax exemption amount between 2024 and 2025 can only be late allocated in the 2025 calendar year, putting pressure on advisors to structure, execute and report their substantive planning recommendations in a relatively condensed timeframe.
Looking Ahead
Late allocations of the GST tax exemption amount are an attractive means for individuals to use the benefits of the TCJA-era increase without the need to gratuitously transfer additional assets, which may be undesirable or impossible without incurring gift tax if the gift and estate tax exclusion amount has been fully exhausted. The technical procedure for making late allocations, however, places time constraints on practitioners in 2025 and may cause confusion both at the time of reporting the late allocations and in subsequent years. Attorneys, accountants, valuation experts and other advisors considering late allocations of GST tax exemption in 2025 should remain aware of these timing constraints and be prepared to handle them when advising clients on a practical level. Absent legislation postponing or eliminating the TCJA sunset, guidance from the IRS as to how practitioners can report late allocations in 2025 or relief from the IRS extending the time for reporting a late allocation in 2025 to the regular deadline for filing the 2025 Form 709 would also help to mitigate potential confusion, both now and in the future, and promote the orderly administration of the federal wealth transfer tax system.
Endnotes
1. Internal Revenue Code Section 2010(c)(3).
2. IRC Section 2631(c) (cross-referencing to ibid.).
3. Pub. L. 115-97 (Dec. 22, 2017).
4. Section 2010(c)(3)(C).
5. Cf. Revenue Procedure 2019-44 (providing that the basic exclusion amount for 2020 is $11.58 million); Rev. Proc. 2023-34 (providing that the basic exclusion amount for 2024 is $13.61 million).
6. See generally IRC Section 2632(c)(5)(A)(i); Treasury Regulations Section 26.2632-1(b)(2)(iii).
7. See IRC Sections 2642(f)(3) (defining “estate tax inclusion period”); 2632(c)(4) (deferring automatic allocation of generation-skipping transfer (GST) tax exemption until the close of the estate tax inclusion period, if applicable).
8. See Section 2642(a)(1) (defining “inclusion ratio”).
9. See generally Treas. Regs. Section 26.2642-6. Practitioners considering a qualified severance in connection with a late allocation of GST tax exemption should review these regulations carefully, as a complete discussion is beyond the scope of this article.
10. Treas. Regs. Section 26.2642-6(c).
11. Section 2642(a)(2) (defining “applicable fraction”) and Treas. Regs. Section 26.2642-4 (providing rules for “redetermining” the same on an allocation of additional GST tax exemption).
12. Treas. Regs. Section 26.2632-1(b)(4)(i).
13. Ibid.
14. 2023 Instructions for Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, at p. 21, www.irs.gov/pub/irs-pdf/i709.pdf.
15. Treas. Regs. Section 26.2632-1(b)(4)(ii)(A)(1).
16. Ibid. Section 26.2632-1(b)(4)(ii)(A)(2).
17. Ibid. Section 26.2642-2(a)(2).
18. Ibid.
19. Ibid.
20. See IRC Sections 2010(c)(3)(A), 2010(c)(3)(C); Treas. Regs. Sections 20.2010-1(e)(3)(ii), -1(e)(3)(iii).
21. Practitioners should also note that a qualified severance consummated in connection with a late allocation of GST tax exemption must be separately reported on Form 706-GS(T).
22. See, e.g., 2023 Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, at p. 5, www.irs.gov/pub/irs-pdf/f709.pdf.
23. See IRC Section 6075(b)(1-2).
