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Schedules R and R-1—Generation-Skipping Transfer Tax Introduction and Overview Schedule R is used to figure the generation-skipping transfer (GST) tax that is payable by the estate. Schedule R-1 is used to figure the GST tax that is payable by certain trusts that are includible in the gross estate. The GST tax reported on Form 706 is imposed on only direct skips occurring at death. Unlike the estate tax, which is imposed on the value of the entire taxable estate regardless of who receives it, the GST tax is imposed on only the value of interests in property, wherever located, that actually pass to certain transferees, who are referred to as skip persons (defined later). For purposes of Form 706, the property interests transferred must be includible in the gross estate before they are subject to the GST tax. Therefore, the first step in figuring the GST tax liability is to determine the property interests includible in the gross estate by completing Schedules A through I of Form 706. The second step is to determine who the skip persons are. To do this, assign each transferee to a generation and determine whether each transferee is a natural person or a trust for GST purposes. See section 2613 and Regulations section 26.2612-1(d) for details. The third step is to determine which skip persons are transferees of interests in property. If the skip person is a natural person, anything transferred is an interest in property. If the skip person is a trust, make this determination using the rules under Interest in property, later. These first three steps are described in detail under Determining Which Transfers Are Direct Skips, later. The fourth step is to determine whether to enter the transfer on Schedule R or on Schedule R-1. See the rules under Dividing Direct Skips Between Schedules R and R-1, later. The fifth step is to complete Schedules R and R-1 using the How To Complete instructions for each schedule. Determining Which Transfers Are Direct Skips Effective dates. The rules below apply only for the purpose of determining if a transfer is a direct skip that should be reported on Schedule R or R-1 of Form 706. In general. The GST tax is effective for the estates of decedents dying after October 22, 1986. Irrevocable trusts. The GST tax will not apply to any transfer under a trust that was irrevocable on September 25, 1985, but only to the extent that the transfer was not made out of corpus added to the trust after September 25, 1985. An addition to the corpus after that date will cause a proportionate part of future income and appreciation to be subject to the GST tax. For more information, see Regulations section 26.2601-1(b)(1). Mental disability. If, on October 22, 1986, the decedent was under a mental disability to change the disposition of property owned and did not regain the competence to dispose of property before death, the GST tax will not apply to any property included in the gross estate (other than property transferred on behalf of the decedent during life and after October 21, 1986). The GST tax will also not apply to any transfer under a trust to the extent that the trust consists of property included in the gross estate (other than property transferred on behalf of the decedent during life and after October 21, 1986). Under a mental disability means the decedent lacked the competence to execute an instrument governing the disposition of property owned, regardless of whether there was an adjudication of incompetence or an appointment of any other person charged with the care of the person or property of the transferor. If the decedent had been adjudged mentally incompetent, a copy of the judgment or decree must be filed with this return. If the decedent had not been adjudged mentally incompetent, the executor must file with the return a certification from a qualified physician stating that in the physician’s opinion the decedent had been mentally incompetent at all times on and after October 22, 1986, and that the decedent had not regained the competence to modify or revoke the terms of the trust or will prior to the decedent’s death or a statement as to why no such certification may be obtained from a physician. Direct skip. The GST tax reported on Form 706 and Schedule R-1 is imposed only on direct skips. For purposes of Form 706, a direct skip is a transfer that is: • Subject to the estate tax, • Of an interest in property, and • To a skip person. All three requirements must be met before the transfer is subject to the GST tax. A transfer is subject to the estate tax if you are required to list it on any of Schedules A through I of Form 706. To determine if a transfer is of an interest in property and to a skip person, you must first determine if the transferee is a natural person or a trust, as defined later. Trust. For purposes of the GST tax, a trust includes not only an ordinary trust (as defined in Special rule for trusts other than ordinary trusts, later), but also any other arrangement (other than an estate) which, although not explicitly a trust, has substantially the same effect as a trust. For example, a trust includes life estates with remainders, terms for years, and insurance and annuity contracts. Substantially separate and independent shares of different beneficiaries in a trust are treated as separate trusts. Interest in property. If a transfer is made to a natural person, it is always considered a transfer of an interest in property for purposes of the GST tax. If a transfer is made to a trust, a person will have an interest in the property transferred to the trust if that person either has a present right to receive income or corpus from the trust (such as an income interest for life) or is a permissible current recipient of income or corpus from the trust (that is, may receive income or corpus at the discretion of the trustee). Skip person. A transferee who is a natural person is a skip person if that transferee is assigned to a generation that is two or more generations below the generation assignment of the decedent. See Determining the generation of a transferee, later. A transferee who is a trust is a skip person if all the interests in the property (as defined above) transferred to the -46- Instructions for Form 706 (Rev. 09-2022)