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transferred to the trust. All of the persons to whom the trust can make future distributions (including distributions upon the termination of interests in property held in trust) are skip persons (for example, the decedent's grandchildren and great-grandchildren). Therefore, the trust itself is a skip person and you should show the transfer on Schedule R. 4. The will establishes a trust that is to pay all of its income to the decedent's grandchildren for 10 years. At the end of 10 years, the corpus is to be distributed to the decedent's children. All of the present interests in this trust are held by skip persons. Therefore, the trust is a skip person and you should show this transfer on Schedule R. You should show the estate tax value of all the property transferred to the trust even though the trust has some ultimate beneficiaries who are non-skip persons. Dividing Direct Skips Between Schedules R and R-1 Report all generation-skipping transfers on Schedule R unless the rules below specifically provide that they are to be reported on Schedule R-1. Under section 2603(a)(2), the GST tax on direct skips from a trust (as defined for GST tax purposes) is to be paid by the trustee and not by the estate. Schedule R-1 serves as a notification from the executor to the trustee that a GST tax is due. For a direct skip to be reportable on Schedule R-1, the trust must be includible in the decedent's gross estate. If the decedent was a surviving spouse receiving benefits for his or her lifetime from a marital deduction power of appointment (or QTIP) trust created by the decedent's spouse, then transfers caused by reason of the decedent's death from that trust to skip persons are direct skips required to be reported on Schedule R-1. If a direct skip is made “from a trust” under these rules, it is reportable on Schedule R-1 even if it is also made “to a trust” rather than to an individual. Similarly, if property in a trust (as defined for GST tax purposes) is included in the decedent's gross estate under section 2035, 2036, 2037, 2038, 2039, 2041, or 2042 and such property is, by reason of the decedent's death, transferred to skip persons, the TIP transfers are direct skips required to be reported on Schedule R-1. Special rule for trusts other than or- dinary trusts. An ordinary trust is defined in Regulations section 301.7701-4(a) as “an arrangement created by a will or by an inter vivos declaration whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts.” Direct skips from ordinary trusts are required to be reported on Schedule R-1 regardless of their size unless the executor is also a trustee (see Executor as trustee below). Direct skips from trusts that are trusts for GST tax purposes but are not ordinary trusts are to be shown on Schedule R-1 only if the total of all tentative maximum direct skips from the entity is $250,000 or more. If this total is less than $250,000, the skips should be shown on Schedule R. For purposes of the $250,000 limit, tentative maximum direct skips is the amount you would enter on line 5 of Schedule R-1 if you were to file that schedule. A liquidating trust (such as a bankruptcy trust) under Regulations section 301.7701-4(d) is not treated as an ordinary trust for the purposes of this special rule. If the proceeds of a life insurance policy are includible in the gross estate and are payable to a beneficiary who is a skip person, the transfer is a direct skip from a trust that is not an ordinary trust. It should be reported on Schedule R-1 if the total of all the tentative maximum direct skips from the company is $250,000 or more. Otherwise, it should be reported on Schedule R. Similarly, if an annuity is includible on Schedule I and its survivor benefits are payable to a beneficiary who is a skip person, then the estate tax value of the annuity should be reported as a direct skip on Schedule R-1 if the total tentative maximum direct skips from the entity paying the annuity are $250,000 or more. Executor as trustee. If any of the executors of the decedent's estate are trustees of the trust, then all direct skips for that trust must be shown on Schedule R and not on Schedule R-1, even if they would otherwise have been required to be shown on Schedule R-1. This rule applies even if the trust has other trustees who are not executors of the decedent's estate. How To Complete Schedules R and R-1 Valuation. Enter on Schedules R and R-1 the estate tax value of the property interests subject to the direct skips. If you elected alternate valuation (section 2032) and/or special-use valuation (section 2032A), you must use the alternate and/or special-use values on Schedules R and R-1. How To Complete Schedule R Part 1. GST Exemption Reconciliation Part 1, line 6, of both Parts 2 and 3, and line 4 of Schedule R-1 are used to allocate the decedent's GST exemption. This allocation is made by filing Form 706 and attaching a completed Schedule R and/or R-1. Once made, the allocation is irrevocable. You are not required to allocate all of the decedent's GST exemption. However, the portion of the exemption that you do not allocate will be allocated by the IRS under the deemed allocation of unused GST exemption rules of section 2632(e). For transfers made through 1998, the GST exemption was $1 million. The current GST exemption is $11,700,000. The exemption amounts for 1999 through 2021 are as follows. Year of transfer GST exemption 1999 $1,010,000 2000 $1,030,000 2001 $1,060,000 2002 $1,100,000 2003 $1,120,000 2004 and 2005 $1,500,000 2006, 2007, and 2008 $2,000,000 2009 $3,500,000 2010 and 2011 $5,000,000 2012 $5,120,000 2013 $5,250,000 2014 $5,340,000 2015 $5,430,000 2016 $5,450,000 2017 $5,490,000 2018 $11,180,000 2019 $11,400,000 2020 $11,580,000 2021 $11,700,000 The amount of each increase can only be allocated to transfers made (or appreciation that occurred) during or after the year of the increase. The following example shows the application of this rule. Instructions for Form 706 (Rev. 09-2021) -45-