879 / What is the inclusion ratio and how is it used for purposes of the GST tax?

In general, the inclusion ratio with respect to any property transferred in a GST is the excess of one minus (a) the “applicable fraction” for the trust from which the transfer is made, or (b) in the case of a direct skip, the applicable fraction determined for the skip.¹The “applicable fraction” is a fraction (a) the numerator of which is the amount of the GST exemption allocated to the trust (or to the property transferred, if a direct skip), and (b) the denominator of which is the value of the property transferred reduced by (i) the sum of any federal estate or state death tax actually recovered from the trust attributable to such property, (ii) any federal gift tax or estate tax charitable deduction allowed with respect to such property, and (iii) with respect to a direct skip, the portion that is a nontaxable gift (see below). The fraction should be rounded to the nearest one-thousandth, with five rounded up (i.e., .2345 is rounded to .235). If the denominator of the applicable fraction is zero, the inclusion ratio is zero.²

Example 1. For illustrative purposes, in the year 2024, G transfers irrevocably in trust for his grandchildren $20 million and allocates all his $13,610,000 GST exemption to the transfer. The applicable fraction is 13,610,000 /20,000,000, or .681. The inclusion ratio is 1 minus .681, or .319. The maximum estate tax rate,
40 percent, is applied against the inclusion ratio, .319. The resulting percentage, 12.76 percent, is applied
against the value of the property transferred, $20,000,000, to produce a GST tax of $2,552,000. The tax is
paid by G, the transferor, because this is a direct skip (other than a direct skip from a trust) (see Q 875).

Example 2. Same facts as in preceding example, except that for federal gift tax purposes G’s spouse consented to a split gift of the $20 million (see Q 888). Thus, for GST tax purposes as well, the gift is considered split between the spouses and the entire gift is sheltered from estate tax by their combined $27.22 million exemption. If tax were owed, it would be paid 1/2 each by G and G’s spouse, the transferors, because each gift is a direct skip (other than a direct skip from a trust) (see Q 875).

Example 3. In 2023, G transfers $100,000 to a trust and allocates $100,000 GST exemption to the trust. The trust has an inclusion ratio of zero, and taxable distributions and taxable terminations can be made free of GST tax.