IRS Form 706 (Schedule R-1) – Generating-Skipping Transfer Tax – The Generation-Skipping Transfer (GST) tax is a federal tax designed to prevent wealthy individuals from avoiding estate taxes by transferring assets directly to grandchildren or further generations. IRS Form 706, the United States Estate (and Generation-Skipping Transfer) Tax Return, includes Schedule R-1 specifically for handling GST tax on direct skips from trusts. This schedule acts as a payment voucher and notification tool between executors and trustees. In this article, we’ll break down what Schedule R-1 is, when it’s required, how to complete it, and key considerations for compliance, especially with changes effective in 2026.
What Is Generation-Skipping Transfer Tax (GST Tax)?
The GST tax applies to transfers that “skip” a generation, such as gifts or bequests to grandchildren, great-grandchildren, or unrelated individuals more than 37.5 years younger than the transferor. It’s imposed under Chapter 13 of the Internal Revenue Code at a flat rate of 40% on the taxable amount exceeding the GST exemption. The tax ensures that assets are taxed at each generational level, closing a potential loophole in estate and gift tax systems.
Direct skips, a common trigger for GST tax, occur when property is transferred outright to a skip person (e.g., a grandchild) or to a trust primarily benefiting skip persons. Unlike indirect skips (e.g., through a trust with intermediate beneficiaries), direct skips are reported on Schedule R or R-1 of Form 706 for estates.
For decedents dying in 2026, the GST exemption reverts to pre-2018 levels due to the sunset of the Tax Cuts and Jobs Act provisions. The exemption amount is approximately $7 million (adjusted for inflation from 2010’s $5 million base), down from $13.99 million in 2025. This change significantly impacts estate planning for high-net-worth individuals.
Purpose of IRS Form 706 Schedule R-1
Schedule R-1 is used when a direct skip involves a trust includible in the decedent’s gross estate. Its primary functions are:
- To compute the GST tax payable by the trust’s trustee.
- To allocate the decedent’s GST exemption to the transferred property.
- To serve as a notification from the estate’s executor to the trustee about the tax due.
Unlike Schedule R (which handles GST tax for non-trust direct skips), Schedule R-1 is specifically for trusts and must be attached to Form 706 if applicable. The executor prepares it, files one copy with Form 706, and sends a copy to the fiduciary (trustee). The trustee then pays the tax separately, not through the estate’s payment.
Key scenarios requiring Schedule R-1 include:
- Transfers to irrevocable trusts benefiting skip persons.
- Property in trusts under IRC Sections 2035–2039, 2041, or 2042.
- QTIP (Qualified Terminable Interest Property) trusts where a reverse QTIP election treats the trust as a direct skip.
If the executor is also the trustee, all direct skips can be reported on Schedule R instead.
Who Needs to File Schedule R-1?
Filing is required for estates where:
- The decedent’s gross estate exceeds the basic exclusion amount (about $7 million in 2026).
- There are generation-skipping transfers via trusts.
- The tentative maximum direct skip from the trust is $250,000 or more (for ordinary trusts; smaller amounts go on Schedule R).
The executor handles preparation and attachment to Form 706, due nine months after the decedent’s death (extensions possible via Form 4768). The trustee receives the schedule, signs it, files a copy with the IRS (mail to Department of the Treasury, Internal Revenue Service, Kansas City, MO 64999), and pays the tax electronically via EFTPS.
Exceptions to GST tax include:
- Transfers to pre-September 25, 1985, irrevocable trusts (no post-date additions).
- Decedents mentally disabled before October 22, 1986, without recovery (certification required).
For nonresident aliens, special rules apply, including no portability of deceased spousal unused exclusion (DSUE) for GST purposes.
How to Complete IRS Form 706 Schedule R-1?
Schedule R-1 has two main parts: Fiduciary and Executor Information (Part I) and GST Tax on the Direct Skip (Part II). Use estate tax values from Form 706 Schedules A–I.
Part I: Fiduciary and Executor Information
- Enter trust details (name, EIN).
- Decedent’s name, SSN, date of death.
- Filing service center, due date (with extensions).
- Fiduciary and executor names, addresses (include foreign details if applicable).
- Sign under penalties of perjury.
Part II: GST Tax on the Direct Skip
List property interests subject to the direct skip:
| Column | Description |
|---|---|
| (i) Item Number | Reference from Form 706 schedules. |
| (ii) Description | Details of property (e.g., real estate, stocks). |
| (iii) Estate Tax Value | Value as reported on Form 706. |
- Line 2: Total estate tax value.
- Line 3: Add totals from additional sheets if needed.
- Line 4: Grand total.
- Line 5: Deduct estate taxes, state death taxes, and other charges borne by the property.
- Line 6: Tentative maximum direct skip (Line 4 minus Line 5).
- Line 7: GST exemption allocated.
- Line 8: Subtract Line 7 from Line 6.
- Line 9: GST tax due (divide Line 8 by 3.5; equivalent to 40% rate since 1 / (1 + 0.40 tax-inclusive adjustment) ≈ 0.2857, but formula simplifies to divide by 3.5 for tax-exclusive base).
If the property does not bear the GST tax (per trust instrument), compute tax at 40% of Line 8 instead. For special-use valuation under Section 2032A, prepare dual worksheets: one at special-use value and one at fair market value to calculate GST savings.
The inclusion ratio (for partial exemptions) is calculated as: 1 – (exemption allocated / nonexempt portion).
Key Calculations and Allocations
- GST Exemption Allocation: Automatic for direct skips unless opted out. Unused exemption is deemed allocated by the IRS. For 2026, allocate up to the reduced exemption amount to minimize tax.
- Tax Rate: 40% on amounts over the exemption.
- Payments: Trustee pays via EFTPS; no check or money order for federal taxes. Late payments accrue interest; extensions don’t stop interest but may avoid penalties.
- Installments: If estate tax is paid in installments under Section 6166, GST tax follows suit, but interest isn’t deductible.
Tips for Compliance and Estate Planning
- Consult IRC Section 2603(a)(2) for liability details.
- Use software or a tax professional for complex trusts, especially with QDOTs or portability.
- Track prior allocations from Forms 709 or notices to avoid over-allocation.
- For 2026 estates, review plans ASAP due to the exemption sunset—consider lifetime gifts to utilize higher pre-2026 exemptions.
Recent Updates for 2026
As of 2026, the GST exemption drops significantly, affecting estates over $7 million. No major form changes from the 2025 revision (Rev. August 2025), but always check IRS.gov for the latest. Generation assignment rules remain, with adjustments for same-sex marriages per Notice 2017-15.
Navigating GST tax and Schedule R-1 requires careful planning to minimize tax burdens. For personalized advice, consult an estate tax attorney or CPA. Download the latest form from IRS.gov.