IRC Section 2642 provides the detailed rules for computing the GST inclusion ratio and for allocating generation skipping transfer tax exemption. It explains how property value, the amount of exemption allocated, and the timing of allocation interact to produce the inclusion ratio described in Section 2641. The statute covers automatic allocation rules, late allocations, and special valuation methods for trusts, including those holding life insurance or other illiquid assets. For planners, Section 2642 is the technical backbone of GST exemption strategy, determining how effectively families can shield dynasty trusts and insurance proceeds from GST tax. When used thoughtfully, its rules allow clients to lock in low inclusion ratios at favorable valuations and magnify the impact of their exemption as trust assets and policy death benefits grow over time.

In real world planning, advisors encounter IRC Section 2642 when working with tax counsel to implement GST efficient dynasty ILITs and multigenerational trusts funded with life insurance, marketable securities, and closely held business interests. A client may allocate GST exemption when a trust is first funded, based on current cash values or premium contributions, even though a much larger death benefit will eventually be paid into the trust. Under Section 2642, that early allocation can create a very low or zero inclusion ratio, making later growth and insurance proceeds effectively GST free. Advisors also learn how automatic allocation rules can help protect clients who forget to make explicit elections, and where those rules may not align with the client's intent. Periodic reviews may reveal opportunities for late allocations, corrective filings, or new trusts with fresh exemption strategies. By understanding Section 2642, producers can confidently position life insurance as a powerful engine for amplifying carefully allocated GST exemption.