Five Common GST Allocation Mistakes and How to Avoid Them

The Generation-Skipping Transfer Tax (GSTT) is a complex aspect of estate planning that aims to prevent large wealth transfers from bypassing estate taxes by skipping generations. The article outlines five common mistakes taxpayers make in GST exemption allocation. These mistakes include failing to account for automatic GST exemptions for unreported gifts, overfunding trusts without enough GST exemption, and relying too heavily on automatic GST exemption allocation. Additionally, gifting to Spousal Lifetime Access Trusts (SLATs) without understanding gift-splitting implications and making distributions to non-skip persons from GST-exempt trusts can lead to inefficiencies in applying the GST exemption.

The first mistake involves taxpayers neglecting to report certain generation-skipping transfers on Form 709, which complicates tracking the GST exemption allocation. This can result in an incomplete gifting history, causing difficulties when determining the remaining GST exemption in the future. To avoid this, the article recommends filing a gift tax return even if not required, and maintaining a detailed record of automatic GST exemption allocations to ensure accurate future planning.

The other mistakes highlight the importance of thorough planning and record-keeping in estate tax strategy. For example, if a trust is overfunded with insufficient GST exemption remaining, a portion of the trust may become taxable, potentially incurring unexpected GSTT liabilities. To address these challenges, the article suggests careful review of all prior transfers, making an affirmative election regarding the GST exemption, and strategically structuring trusts to avoid misallocation or unintended use of the exemption. Ultimately, the article emphasizes proactive estate planning to avoid costly tax consequences.

For more information see Carol G Warley, Amber M Waldman, and Rachel Ruffalo “Five Common GST Allocation Mistakes and How to Avoid Them” ABA Probate and Property Journal, September 1, 2024.