IRS Form 706 (Schedule R) – Estate planning for high-net-worth families often involves minimizing taxes across multiple generations. The Generation-Skipping Transfer (GST) tax prevents wealthy individuals from avoiding estate taxes by transferring assets directly to grandchildren or more remote descendants. IRS Form 706 Schedule R handles the calculation and reporting of this tax on the United States Estate (and Generation-Skipping Transfer) Tax Return.
This comprehensive guide explains IRS Form 706 Schedule R, who must file it, key concepts like the inclusion ratio, step-by-step completion instructions, current exemption amounts, and planning strategies. Whether you’re an executor, estate planner, or beneficiary, understanding Schedule R helps protect family wealth from the flat 40% GST tax rate.
What Is the Generation-Skipping Transfer Tax (GST Tax)?
Congress enacted the GST tax under Chapter 13 of the Internal Revenue Code to ensure taxation when wealth “skips” a generation. Without it, a transfer to a grandchild would incur only one level of estate or gift tax instead of two.
The GST tax applies to three types of transfers:
- Direct skips — Outright transfers (or certain trust transfers) directly to a “skip person” (e.g., grandchild or a trust where skip persons hold more than 50% interest).
- Taxable terminations — When a non-skip person’s interest in a trust ends, leaving the property to skip persons (e.g., a child’s life estate terminates, and assets pass to grandchildren).
- Taxable distributions — Distributions from a trust to a skip person (other than direct skips or terminations).
The tax rate is a flat 40% (the highest estate and gift tax rate) applied to the taxable amount after allocating the GST exemption and applying the inclusion ratio.
Skip person definition: An individual two or more generations below the transferor (e.g., grandchildren), or unrelated persons more than 37.5 years younger. Special rules apply for adopted children, predeceased parents, and entities like trusts.
Who Must File Schedule R with Form 706?
Executors attach Schedule R (Form 706) to Form 706 when the decedent’s estate includes property subject to GST tax or when allocating the GST exemption to trusts that may produce future taxable distributions or terminations.
File Schedule R even if no GST tax is currently due. This proactive allocation prevents unfavorable “deemed allocation” rules under IRC §2632(e), which could waste exemption or create partial inclusion ratios.
Key triggers include:
- Direct skips to grandchildren or younger.
- Trusts in the gross estate that may benefit skip persons.
- Need to make a special QTIP election under §2652(a)(3).
Note: For direct skips from trusts (where the trustee pays the tax), use Schedule R-1 (Form 706) as a payment voucher. The executor files one copy with Form 706 and sends a copy to the trustee.
Form 706 (and thus Schedule R) is generally required if the gross estate plus adjusted taxable gifts exceeds the basic exclusion amount ($13.99 million for 2025 deaths; $15 million for 2026 deaths).
Current GST Exemption Amounts (2025–2026)
The GST exemption equals the basic exclusion amount for estate and gift taxes:
- 2025 deaths: $13,990,000 per individual.
- 2026 deaths: $15,000,000 per individual (increased and made permanent by recent legislation, often referred to as the One Big Beautiful Bill).
Married couples can effectively double this through proper planning and portability (DSUE), though GST exemption allocation is transferor-specific. The exemption is portable in some contexts via timely Form 706 filing, but proactive allocation on Schedule R is essential for trusts.
Unused exemption can be allocated to lifetime transfers (via Form 709) or at death.
Key Concepts: Inclusion Ratio and Applicable Rate
The inclusion ratio determines how much of a transfer or trust is subject to GST tax:
Inclusion Ratio = 1 – (GST Exemption Allocated ÷ Value of Property Transferred)
- 0.00 → Fully exempt (ideal for dynasty trusts).
- 1.00 → Fully taxable.
- Fractional (e.g., 0.40) → Partial tax on future events.
Applicable rate = 40% × Inclusion ratio. For example, a 0.25 inclusion ratio produces a 10% effective GST rate.
Executors calculate the ratio using estate tax values (or alternate valuation if elected). Trustees may need to track and apply it for future distributions or terminations.
Qualified severance allows splitting a trust with a fractional ratio into fully exempt (ratio 0) and non-exempt (ratio 1) portions, simplifying administration.
Step-by-Step: How to Complete Schedule R (Form 706)
The August 2025 revision of Schedule R includes three main parts. Always use the latest form and instructions from IRS.gov.
Part I: GST Exemption Reconciliation and Special QTIP Election
Reconcile the total available exemption and allocate it.
- Line 1: Maximum allowable GST exemption (e.g., $15 million for 2026 deaths).
- Subtract prior allocations (lifetime transfers on Form 709, etc.).
- Allocate to direct skips (Parts II/III) and remaining to trusts (line 9: name, EIN, amount allocated, optional inclusion ratio).
- Special QTIP election (§2652(a)(3)): List qualifying QTIP property on line 9 to treat it as non-QTIP for GST purposes, allowing exemption allocation while claiming the marital deduction.
This part prevents deemed allocations and supports dynasty trust planning.
Part II: Direct Skips Where Property Bears the GST Tax
Use this for direct skips where the transferred property pays the GST tax (common for outright bequests).
- List skip persons, property descriptions, and estate tax values.
- Subtract estate taxes and other charges borne by the property.
- Allocate exemption.
- Compute tentative tax (generally taxable amount ÷ 3.5? Wait, per form: specific computation leading to tax at 40% effective rate after adjustments).
The form instructions provide precise line-by-line math.
Part III: Direct Skips Where Property Does Not Bear the GST Tax
Use when the estate or another source pays the GST tax (e.g., tax is a separate estate obligation).
- Similar listing and calculations.
- Tax = taxable amount × 40%.
- Total GST tax from Parts II and III flows to Form 706, Part 2, line 19 (or equivalent in redesigned form).
Worksheets (in instructions) help compute inclusion ratios for trusts.
Schedule R-1: For direct skips from trusts includible in the estate. The trustee pays the tax shown; executor provides the voucher.
Common Mistakes and Pro Tips
- Failing to allocate → IRS deemed rules may create inefficient partial ratios.
- Over-allocating → Excess allocation to a trust beyond zero inclusion ratio is void.
- Missing special QTIP election → Wastes exemption on marital trust property.
- Incorrect valuation → Use consistent estate tax values; consider alternate or special-use valuation impacts.
- Late allocations → Possible on supplemental Form 706 or Form 709, but timely is best.
Planning strategies:
- Allocate enough exemption for a zero inclusion ratio on key trusts.
- Use qualified severances for mixed-ratio trusts.
- Coordinate with QTIP and portability elections.
- Consider GST-exempt trusts for dynasty planning (no tax on distributions or terminations for generations).
Deadlines, Penalties, and Resources
File Form 706 (with Schedule R) within 9 months of death (extensions available up to 6 months, or longer in some cases). Late filing or payment can trigger penalties and interest.
For the latest forms and instructions:
- Schedule R (Form 706): IRS.gov/pub/irs-pdf/f706sr.pdf
- Full Instructions for Form 706: IRS.gov/pub/irs-pdf/i706.pdf
Always consult a qualified estate tax attorney or CPA. GST rules are complex, and small errors can lead to significant tax liabilities or lost planning opportunities.
Bottom line: Proper use of IRS Form 706 Schedule R and strategic GST exemption allocation can save millions in taxes for multi-generational families. With the 2026 exemption at $15 million (and rising with inflation), now is an excellent time to review estate plans.
This article is for informational purposes only and is not tax or legal advice. Tax laws change; verify with official IRS sources or a professional advisor for your specific situation.
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