Allocation of GST exemption.

A donor making a gift in trust subject to the direct distribution and termination taxes, under the Chapter 13 generation-skipping transfer (GST) tax rules, generally should allocate the donor's GST exemption as of the time of the gift. If the allocation is made at a later date, the amounts applied from the total $1 million exemption are taken at the gift property's fair market value (FMV) at the later date of allocation. Generally, the donor selects property for a gift program based on an expectation of appreciation in value between the date of gift and date of death, in order to exclude the increase in value from the donor's estate. Assuming the expected appreciation occurs, allocation at the later date will protect a smaller portion of the trust.

Application of the GST exemption using date of gift values requires the allocation be made on a timely filed gift tax return (excluding extensions). Sometimes the donor wishes to apply the exemption on a formula basis, depending on the final outcome if the IRS disputes the gift property's FMV. The Service has not provided guidance in proposed regulations or otherwise for the mechanics of the allocation. Tax advisers should note that completion of the gift return, Form 709, Schedule C, Part II, does not constitute an allocation of the exemption but merely reconciles the remaining GST exemption.

A separate notice of allocation of the GST exemption should be attached to the return. If a formula allocation is desired, the notice should refer to the allocation of the donor's GST exemption remaining as is necessary to produce an inclusion ratio closest to or if possible equal to zero for each of the gifts (usually by naming the generation-skipping trust). Automatic allocation rules apply to direct skip gifts and bequests. From Gary N. Cohen, Esq., Washington, D.C,