Executive Summary
GST Exemption provided in The One Big Beautiful Bill Act, signed into law on July 4, 2025, has fundamentally altered the estate planning landscape. While many advisors have focused on the elimination of the TCJA sunset provisions, a more nuanced opportunity exists for families with existing non-GST exempt trusts. The permanent increase in the generation-skipping transfer (GST) exemption to $15 million per individual in 2026 creates strategic possibilities that warrant immediate attention.
This analysis examines techniques for allocating GST exemption to trusts that were previously established without such protection, including late allocation strategies, trust restructuring approaches, and the implementation of general powers of appointment. We will also address the critical IRS positions that may affect remainder beneficiaries when consenting to trust modifications.
The New GST Exemption Framework
Under the One Big Beautiful Bill Act, the federal lifetime gift, estate, and generation-skipping transfer tax exemptions have been permanently increased to $15 million per individual, effective January 1, 2026.
For married couples, this represents $30 million in combined transfer tax shelter. Importantly, this legislation eliminated the TCJA sunset provision that would have reduced the exemption to approximately $7 million per person. The permanence of this increase, combined with continued inflation indexing, creates planning stability that did not exist under the TCJA regime. However, the legislation also introduces new planning dynamics, particularly for clients who previously structured their plans around anticipated exemption reductions.
Family Wealth Implications for Existing Non-Exempt GST Trusts
Many irrevocable trusts established in prior years were funded without full allocation of the transferor’s GST exemption. This occurred for various reasons: the transferor may have believed the trust would benefit only non-skip persons, the exemption amount may have been insufficient to cover all transfers, or the automatic allocation rules may not have applied to the particular trust structure. Balanced Wealth Strategies LLC
With the increased exemption amounts now available, families may find they have unused GST exemption that could be strategically deployed to existing trusts. The key question becomes: what mechanisms exist to convert a non-exempt trust into a GST-protected vehicle?
Late Allocation of GST Exemption
The most straightforward approach to protecting a non-exempt trust from GST tax is through a late allocation of the transferor’s available exemption. Under Treasury Regulation Section 26.2632-1(b)(4), a transferor may allocate GST exemption to a trust at any time, provided the allocation is made before a taxable distribution or taxable termination occurs.
Mechanics of Late Allocation
A late allocation differs from a timely allocation in one critical respect: the exemption is applied based on the fair market value of the trust assets at the time of the late allocation, not the original transfer date. This timing consideration can work either for or against the taxpayer.
In advantageous scenarios where trust assets have declined in value since the original transfer, a late allocation preserves GST exemption by using the lower current value, effectively allowing the transferor to protect the same assets with fewer exemption dollars. Conversely, in disadvantageous scenarios where trust assets have appreciated significantly, the late allocation will consume more exemption than would have been required at the time of the original transfer, potentially exhausting the transferor’s available exemption before all intended trusts can be protected.
The late allocation is reported on Form 709 and becomes effective on the date the return is filed. A special election under Treasury Regulation Section 26.2642-2(a)(2) permits the taxpayer to treat the allocation as having been made on the first day of the month during which the late allocation is made, provided the return is filed before the end of that month.
Strategic Considerations for GST Exemption Allocation
For transferors with unused GST exemption following the 2026 increase, several factors should guide the decision to make a late allocation.
The current trust value represents the starting point for any analysis, requiring a current appraisal of trust assets to determine the exemption needed to achieve a zero inclusion ratio. Beneficiary demographics also warrant careful consideration, specifically whether distributions to skip persons are likely within the trust’s remaining term or whether the trust may be exhausted through distributions to non-skip persons. The transferor should evaluate alternative uses of exemption, considering whether the exemption might be more efficiently deployed to new transfers with greater appreciation potential rather than existing trusts with assets that have already grown. Finally, the transferor’s health introduces timing considerations, as late allocations must be made during the transferor’s lifetime, and if the transferor’s death would trigger a taxable termination, the allocation must be completed before that event occurs.
Trust Revocation and Reformation Family Wealth Strategies
When late allocation is impractical or inefficient, more aggressive restructuring may be warranted. These approaches carry greater complexity and potential tax exposure, but may be the only viable path for certain trust structures.
Trust Termination and Re-Funding
One approach involves terminating the existing non-exempt trust by distributing its assets to the current beneficiaries, followed by a new transfer to a properly structured GST-exempt trust. This strategy has the advantage of allowing GST exemption to be allocated to the new transfer at current values, potentially with the benefit of any applicable valuation discounts.
However, termination carries significant considerations that must be carefully evaluated. The distribution may trigger income tax consequences if the trust holds appreciated assets, as the trust will recognize gain on any assets distributed in kind that have a fair market value exceeding their adjusted basis. The beneficiary’s subsequent transfer to the new trust constitutes a gift from the beneficiary, not from the original transferor, which means the beneficiary’s GST exemption rather than the original transferor’s must be used to exempt the new trust. Additionally, asset protection and creditor concerns may arise during the transition period when the assets are held directly by the beneficiary before being transferred to the new trust structure.
Trust Decanting
Decanting—the distribution of assets from one trust to another with different terms—presents an alternative to termination. Many states now have decanting statutes that permit trustees to distribute trust principal to a new trust with modified provisions.
For GST purposes, decanting from a non-exempt trust to a new trust does not, by itself, convert the assets to GST-exempt status. The receiving trust will generally retain the same inclusion ratio as the distributing trust. However, decanting may facilitate subsequent planning, such as creating a structure more amenable to late allocation or the implementation of general powers of appointment.
Critical Warning: The IRS announced in Notice 2011-101 that it would not rule on certain tax consequences of decanting, including income, gift, and GST tax implications when the decanting changes beneficial interests. This uncertainty persists more than a decade later, and practitioners should proceed with appropriate caution.
General Powers of Appointment: A GST Exemption Planning Tool
A sophisticated technique for managing GST exposure in non-exempt trusts involves the strategic use of general powers of appointment (GPOAs). Understanding this mechanism requires careful analysis of how powers of appointment affect transferor status for GST purposes.
The Transferor Shift Mechanism
Under IRC Section 2652(a), the identity of the “transferor” for GST purposes is critical because only the transferor may allocate GST exemption to a trust. When a beneficiary holds a general power of appointment over trust assets, the exercise, release, or lapse of that power causes the beneficiary to become the new transferor for GST purposes.
This transferor shift has profound implications: if the income beneficiary of a non-exempt trust holds a general power of appointment, upon that beneficiary’s death the trust assets will be included in the beneficiary’s gross estate under IRC Section 2041. The beneficiary’s estate then becomes the transferor, and the beneficiary’s available GST exemption may be allocated to the trust assets.
Implementing a General Power of Appointment
For existing non-exempt trusts, the question becomes whether a GPOA can be added through trust modification. This approach offers several potential benefits.
The estate tax offset advantage arises when the income beneficiary’s estate is below the applicable exclusion amount, as inclusion of the trust assets generates no estate tax while allowing the beneficiary’s GST exemption to shield the assets from generation-skipping transfer tax. Estate inclusion also triggers a basis adjustment under IRC Section 1014, potentially eliminating built-in capital gains that would otherwise be realized when the trust assets are eventually sold. Through a formula approach, the GPOA can be limited to the amount that will not increase the beneficiary’s estate tax, maximizing the basis step-up while minimizing any transfer tax exposure.
Private Letter Ruling 202206008 provided favorable guidance on this approach, approving a judicial modification to add a formula testamentary general power of appointment to a grandfathered trust. The IRS ruled that the modification did not disturb the trust’s GST-exempt status and would cause estate inclusion only over the appointive assets.
Structuring the Power
When implementing a GPOA to manage GST exposure, careful drafting is essential to achieve the intended tax results while addressing family governance concerns.
The choice between a testamentary and lifetime power represents the threshold decision, with a testamentary GPOA exercisable only at death providing control over timing while ensuring estate inclusion occurs at the appropriate moment. The universe of permissible appointees warrants consideration, as the power may be limited to the creditors of the beneficiary’s estate, which still constitutes a general power for tax purposes but may reduce family conflict concerns by preventing the beneficiary from appointing assets to unrelated parties during lifetime. Contingent activation provisions offer additional flexibility, with the GPOA drafted to become effective only if necessary to avoid GST tax, providing adaptability if exemption rules change through future legislation. A formula limitation can further refine the power’s scope, covering only the largest amount that will not increase the beneficiary’s transfer taxes and thereby preserving flexibility while capping exposure to estate tax on the appointive assets.
The IRS Position on Remainder Beneficiary Consent
Any modification to an existing trust that benefits the income beneficiary at the potential expense of remainder beneficiaries must contend with the IRS’s aggressive stance articulated in Chief Counsel Advice 202352018. This pronouncement has significant implications for GST-motivated trust modifications.
The CCA 202352018 Framework
In CCA 202352018, released December 29, 2023, the IRS addressed the gift tax consequences when beneficiaries consent to trust modifications. The facts involved a grantor trust modification to add a tax reimbursement clause, but the reasoning extends to any modification that dilutes beneficiary interests.
The IRS concluded that beneficiaries who consent to modifications that diminish their interests have made taxable gifts. More troubling, the CCA stated that “the result would be the same if the modification was pursuant to a state statute that provides beneficiaries with a right to notice and a right to object to the modification and a beneficiary fails to exercise their right to object.”
Application to GPOA Modifications
When a trust is modified to add a general power of appointment for the income beneficiary, remainder beneficiaries may be viewed as surrendering value. If the income beneficiary exercises the GPOA in favor of persons other than the default remainder beneficiaries, the remainder beneficiaries’ interests are diluted or eliminated.
Under the CCA 202352018 framework, remainder beneficiary consent (or failure to object) to such a modification could constitute a taxable gift. The valuation of such a gift would be complex, requiring actuarial calculations based on the probability of the power being exercised adversely to the remainder interest.
Mitigating Strategies
Several approaches may mitigate the remainder beneficiary gift exposure under the CCA 202352018 framework.
Trustee-initiated modification represents perhaps the strongest defense, as the modification may fall outside the CCA’s framework entirely when the trustee possesses authority under the trust instrument or applicable state law to make modifications without beneficiary consent. Similarly, trust protector action may avoid the consent characterization where a trust protector has been granted modification authority and exercises that power independently. Decanting without notice offers another pathway in jurisdictions where the decanting statute does not require beneficiary notice or consent, as the trustee’s unilateral action should not be attributable to the beneficiaries. In some cases, the de minimis value exception may apply where the remainder interest’s value is minimal due to the beneficiary’s advanced age, the trust’s short remaining term, or other factors that reduce the present value of the remainder to an immaterial amount. Finally, demonstrating offsetting benefits may negate any gift, particularly where the modification provides corresponding advantages to remainder beneficiaries such as a basis step-up on appreciated assets that will ultimately pass to them, resulting in a net gift of zero or even a negative value.
Valuation Challenges
The IRS acknowledged in CCA 202352018 that “the determination of the values of the gifts requires complex calculations” but stated that beneficiaries “cannot escape gift tax on the basis that the value of the gift is difficult to calculate.” This creates practical challenges for practitioners that deserve careful consideration.
How should practitioners value a remainder interest that becomes subject to a newly-created general power of appointment when the power holder retains complete discretion over whether and how to exercise that power? Traditional actuarial valuation methods assume fixed probabilities and predictable outcomes, yet a general power of appointment introduces genuine uncertainty about whether the remainder beneficiary will receive anything at all. The value of the remainder interest theoretically decreases to account for the possibility that the power holder will appoint the assets elsewhere, but quantifying this reduction requires assumptions about human behavior that no actuarial table can capture. Practitioners may need to engage qualified appraisers who specialize in complex trust interests and who can develop defensible methodologies based on factors such as the relationship between the power holder and remainder beneficiaries, the power holder’s existing estate planning documents, and historical family wealth transfer patterns.
What actuarial framework applies when the general power of appointment is contingent upon future events, such as a formula that activates the power only if necessary to avoid GST tax? Contingent powers present compounded valuation difficulties because the appraiser must first estimate the probability that the contingency will occur and then estimate the probability that the power will be exercised adversely to the remainder beneficiaries. The IRS has not provided guidance on acceptable methodologies for these layered contingencies. One defensible approach may involve scenario analysis that assigns probabilities to various legislative and family outcomes, though any such methodology will necessarily involve subjective judgments. Documentation of the appraiser’s reasoning and the assumptions underlying the valuation becomes critical in establishing a reasonable basis for the gift tax reporting position.
To what extent should the valuation account for the income beneficiary’s known intentions or historical behavior regarding the exercise of fiduciary and dispositive powers? The regulations governing gift tax valuation generally focus on objective factors rather than subjective intent, yet ignoring relevant evidence of likely behavior seems inconsistent with fair market value principles. If the income beneficiary has executed estate planning documents that would direct the appointive assets to the same individuals who are the default remainder beneficiaries, this evidence arguably supports a lower valuation of the deemed gift. Conversely, if there is evidence of family discord or the power holder has expressed intentions to exercise the power in favor of others, a higher valuation may be warranted. Practitioners should document all relevant evidence and be prepared to defend their valuation methodology if challenged.
Practical Implementation Framework
For families considering GST exemption allocation to non-exempt trusts, we recommend the following analytical framework.
Step 1: Trust Diagnosis
The initial phase requires a comprehensive assessment of each trust’s current status. This includes determining the current inclusion ratio and GST status, identifying the original transferor and any subsequent deemed transferors who may have acquired that status through the exercise or lapse of powers of appointment, reviewing prior gift tax returns for automatic allocation elections, manual allocations, or opt-out elections, and obtaining current valuations of all trust assets including formal appraisals where appropriate.
Step 2: Exemption Analysis
With the trust diagnosis complete, the analysis turns to the transferor’s available resources. This involves calculating the transferor’s remaining GST exemption after the 2026 increase takes effect, comparing the exemption required for a late allocation against the exemption that would be needed under alternative strategies, and considering competing uses for available exemption such as new transfers to dynasty trusts or other planning vehicles that may offer greater long-term leverage.
Step 3: Strategy Selection
The strategy selection phase weighs the available options against the family’s objectives and risk tolerance. This requires evaluating late allocation feasibility and efficiency given current trust values, assessing GPOA implementation and the estate inclusion consequences for the income beneficiary, considering decanting or reformation options under applicable state law, and analyzing remainder beneficiary gift exposure under the CCA 202352018 framework with particular attention to mitigation strategies.
Step 4: Documentation and Implementation
The final phase involves executing the chosen strategy with appropriate documentation. This includes preparing necessary trust modifications or court petitions with supporting memoranda, obtaining required consents or court approval while documenting the basis for any position that beneficiary consent does not constitute a taxable gift, filing Form 709 with late allocation elections and supporting schedules if applicable, and documenting gift tax reporting positions for remainder beneficiaries including any qualified appraisals obtained.
Conclusion
The permanent increase in the GST exemption to $15 million per individual creates meaningful opportunities to protect existing trusts from generation-skipping transfer tax exposure. However, the path to GST protection for non-exempt trusts is rarely straightforward.
Late allocation of GST exemption offers the most direct approach where the transferor retains available exemption. For more complex situations, implementing a general power of appointment for the income beneficiary can shift transferor status and permit utilization of the beneficiary’s own exemption.
Throughout this analysis, the IRS’s position in CCA 202352018 looms as a potential obstacle. Any modification that requires remainder beneficiary consent—or even mere failure to object—may trigger gift tax exposure. Careful structuring using trustee authority, trust protector powers, or decanting may navigate around these concerns.
We encourage clients with non-exempt trusts to revisit their planning in light of the new exemption amounts. The combination of increased exemption, permanent legislation, and strategic modification techniques creates a compelling opportunity for families willing to engage in sophisticated planning to avoid significant future transfer taxes associated with their Non-Exempt Generating Skipping Transfer Trusts. Contact Mark to discuss your specific situation.
This article is provided for informational purposes only and does not constitute legal or tax advice. The tax treatment of any transaction depends on the specific facts and circumstances involved. Readers should consult with qualified legal and tax professionals before implementing any planning strategies discussed herein.
- Should I make a late allocation of my newly available GST exemption to an existing trust, or would restructuring the trust provide a better long-term outcome? There is no single answer that applies in every situation, and the appropriate strategy depends on a careful comparison of the alternatives. A late allocation can be highly effective when you have available GST exemption and the trust’s current value is reasonable relative to that exemption, allowing the trust to become GST-protected without altering its terms or disturbing family relationships. Restructuring approaches such as terminating and re-funding a new trust, decanting, or modifying the document to add a general power of appointment may be more appropriate when the trust’s existing terms no longer support the family’s objectives, when the trust has appreciated so substantially that a late allocation would consume more exemption than you wish to use, when the trust’s administrative provisions have become outdated or inefficient, or when the family desires modern features such as directed trustees, enhanced asset-protection terms, or trust-protector authorities. We typically model both options side-by-side, comparing the projected GST savings against the exemption usage and administrative costs, and that quantitative comparison is what ultimately determines the optimal choice for each family’s circumstances.
- If my trust requires modification to add a general power of appointment, will the remainder beneficiaries be treated as making a taxable gift under the framework established in IRS Chief Counsel Advice 202352018? The answer depends substantially on how the modification is structured and implemented. In CCA 202352018, the IRS stated that when beneficiaries consent to a modification that decreases or alters their beneficial interest, they may be treated as making a taxable gift, and the IRS further suggested that even a beneficiary’s failure to object could sometimes be interpreted as consent depending on applicable state law. When adding a general power of appointment for the income beneficiary, the remainder beneficiaries may technically surrender part of their interest if the power can be exercised in favor of someone other than themselves, and that shift in value could trigger gift tax reporting obligations. Several planning strategies may mitigate this exposure, including having the trustee or trust protector implement the modification when the governing document or state law grants such authority without requiring beneficiary consent, pursuing a court-approved modification where the court rather than the beneficiaries determines the effect on beneficial interests, or demonstrating that the modification provides offsetting benefits such as a basis step-up or that the actuarial reduction in value is immaterial. Given the IRS’s aggressive posture in this area, any modification involving the addition of a general power of appointment should be evaluated by counsel familiar with both federal transfer tax rules and the trust modification statutes of the applicable jurisdiction.
- How do I determine whether a late allocation is efficient if my trust assets have significantly appreciated since the original transfer? Because a late allocation uses the trust’s current fair market value rather than the value at the time of the original transfer, appreciation directly increases the amount of GST exemption required to achieve a zero inclusion ratio. To evaluate whether the allocation represents an efficient use of your exemption, we typically begin by obtaining a current valuation of all trust assets, including formal appraisals for real estate, closely-held business interests, and other assets requiring professional valuation. We then calculate how much exemption would be needed today to reach a zero inclusion ratio and compare that amount to your total available GST exemption following the 2026 increase. The analysis also involves modeling the future GST exposure if no allocation is made, evaluating whether the GST exemption could produce greater long-term benefit if applied to new transfers rather than existing trusts, and considering whether alternative strategies such as adding a general power of appointment could shift transferor status and permit a different person’s GST exemption to protect the trust. When the projected long-term GST savings meaningfully outweigh the exemption cost of the late allocation, the strategy is generally considered efficient and should be pursued.
- What steps should I take before 2026 to evaluate whether my non-exempt trusts can or should become GST-exempt under the new exemption rules? A systematic review process produces the most reliable results and ensures that no planning opportunities are overlooked. We recommend beginning with a comprehensive inventory of all trusts, gathering the original trust agreements, any amendments, and current beneficiary summaries for each. The next step involves determining the GST status of each trust, classifying them as fully exempt, partially exempt, or non-exempt based on the inclusion ratio, which requires reviewing prior Form 709 filings to identify any automatic allocations, manual allocations, or opt-out elections that may have been made. You should then estimate your available GST exemption beginning in 2026, accounting for any expected lifetime transfers that may occur before that date. For trusts that emerge as candidates for late allocation or restructuring, updated valuations should be obtained to enable meaningful analysis. We generally recommend prioritizing trusts that benefit skip persons or hold high-growth assets, as these present the greatest potential GST exposure. With this information assembled, you can evaluate the available planning options including late allocation, trust modification, decanting, or strategies based on general powers of appointment, and develop a formal timeline for implementing any modifications and filing the required gift tax returns. Completing this preparatory work before 2026 allows you to take advantage of the increased exemption with proper analysis, thorough documentation, and coordinated guidance from your legal and tax advisors.