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annual exclusion. However, you must

2000, your maximum GST exemption

Line 5

allocate the exclusion on a gift-by-gift

would be $1,030,000, not $1,100,000.

Enter on line 5 the amount of GST

basis for GST computation purposes. You

exemption you are applying to transfers

must allocate the exclusion to each gift to

The donor can apply this exemption to

reported in Part 3 of Schedule A.

the maximum allowable amount and in

inter vivos transfers (i.e., transfers made

Section 2632(c) provides an automatic

chronological order, beginning with the

during the donor’s life) on Form 709. The

allocation to indirect skips of any unused

earliest gift that qualifies for the exclusion.

executor can apply the exemption on

GST exemption. The unused exemption

Be sure that you do not claim a total

Form 706 to transfers taking effect at

is allocated to indirect skips to the extent

exclusion of more than $11,000 per

death. An allocation is irrevocable.

necessary to make the inclusion ratio

donee.

zero for the property transferred. You may

Note: You may not claim any annual

elect out of this automatic allocation as

In the case of inter vivos direct skips, a

exclusion for a transfer made to a trust

explained in the instructions for Part 3 on

portion of the donor’s unused exemption

unless the trust meets the requirements

page 9.

is automatically allocated to the

discussed under Direct Skip on page 6.

transferred property unless the donor

Line 6

Part 2—GST Exemption

elects otherwise. To elect out of the

Notice of allocation. You may wish to

Reconciliation

automatic allocation of exemption, you

allocate GST exemption with this return to

must file Form 709 and attach a

transfers not reported on this return, such

Line 1

statement to it clearly describing the

as a late allocation.

Every donor is allowed a lifetime GST

transaction and the extent to which the

To allocate your exemption to such

exemption. The amount of the exemption

automatic allocation is not to apply.

transfers, attach a statement to this Form

is indexed for inflation and is published

Reporting a direct skip on a timely filed

709 and entitle it “Notice of Allocation.”

annually by the IRS in a revenue

Form 709 and paying the GST tax on the

The notice must contain the following for

procedure. For transfers made through

transfer will qualify as such a statement.

each trust (or other transfer):

1998, the GST exemption was $1 million.

•

Clearly identify the trust, including the

The increased exemption amounts are as

Special QTIP election. If you have

trust’s EIN, if known;

follows:

elected QTIP treatment for any gifts in

•

If this is a late allocation, the year the

Year

Amount

trust listed on Schedule A, then you may

transfer was reported on Form 709;

1999 . . . . . . . . . $1,010,000

make an election on Schedule C to treat

•

The value of the trust assets at the

2000 . . . . . . . . . $1,030,000

the entire trust as non-QTIP for purposes

effective date of the allocation;

•

2001 . . . . . . . . . $1,060,000

of the GST tax. The election must be

The amount of your GST exemption

2002 . . . . . . . . . $1,100,000

made for the entire trust that contains the

allocated to each gift (or a statement that

2003 . . . . . . . . . $1,120,000

particular gift involved on this return. Be

you are allocating exemption by means of

sure to identify by item number the

a formula such as “an amount necessary

In general, each annual increase can only

specific gift for which you are making this

to produce an inclusion ratio of zero”);

be allocated to transfers made (or

special QTIP election.

and

appreciation occurring) during or after the

year of the transfer.

Table for Computing Tax

Example. A donor had made $1.5 million

in GST transfers through 2001, and had

allocated all $1,060,000 of the exemption

to those transfers. In 2002, the donor

Column A

Column B

Column C

Column D

makes a $5,000 taxable generation-

skipping transfer. The donor can allocate

$5,000 of exemption to the 2002 transfer

Rate of tax

but cannot allocate the $35,000 of unused

Taxable

Tax on

on excess

2002 exemption to pre-2002 transfers.

amount

amount in

over amount

over

not over —

Column A

in Column A

However, if in 1998 the donor had

made a $1.5 million transfer to a trust that

- - - - -

$10,000

- - - - -

18%

was not a direct skip, but from which

$10,000

20,000

$1,800

20%

generation-skipping transfers could be

20,000

40,000

3,800

22%

made in the future, the donor could

40,000

60,000

8,200

24%

allocate the increased exemption to the

60,000

80,000

13,000

26%

trust, even though no additional transfers

were made to the trust. See Regulations

80,000

100,000

18,200

28%

section 26.2642-4 for details on the

100,000

150,000

23,800

30%

redetermination of the applicable fraction

150,000

250,000

38,800

32%

when additional exemption is allocated to

250,000

500,000

70,800

34%

the trust.

500,000

750,000

155,800

37%

You should keep a record of your

transfers and exemption allocations to

750,000

1,000,000

248,300

39%

make sure that any future increases are

1,000,000

1,250,000

345,800

41%

allocated correctly.

1,250,000

1,500,000

448,300

43%

1,500,000

2,000,000

555,800

45%

Enter on line 1 of Part 2 the maximum

2,000,000

_ _ _ _ _

780,800

49%

GST exemption you are allowed. This will

not necessarily be the highest indexed

amount if you have made no GST transfer

during the year of the increase. For

example, if your last GST transfer was in

-11-

Instructions For Form 709 - United States Gift (And Generation-Skipping Transfer) Tax Return - 2003 Page 11

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