Generation Skipping Transfer Tax

<div class="Section1">With respect to property transferred after October&nbsp;13, 1987, the GST tax exemption inclusion ratio for any charitable lead annuity trust (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8104">8104</a>) is to be determined by dividing the amount of exemption allocated to the trust by the value of the property in the trust following the charitable term. For this purpose, the exemption allocated to the trust is increased by interest determined at the interest rate used in determining the amount of the estate or gift tax charitable deduction with respect to such a trust over the charitable term. With respect to a late allocation of the GST exemption (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="880">880</a>), interest accrues only from the date of the late allocation. The amount of GST exemption allocated to the trust is not reduced even though it is determined at a later time that a lesser amount of GST exemption would have produced a zero inclusion ratio.<a href="#_ftn1" name="_ftnref1">¹</a><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp; IRC &sect; 2642(e), Treas. Reg. &sect; 26.2642-3.<br /> <br /> </div></div><br />

<div class="Section1">For decedents dying before 2005, if a GST (other than a direct skip) occurs at the same time as and as a result of the death of an individual, a credit against the GST tax imposed is allowed in an amount equal to the GST tax paid to any state in respect to any property included in the GST, but the amount cannot exceed 5 percent of the GST tax.<a href="#_ftn1" name="_ftnref1">¹</a> The amendments made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA 2001) sunset after December 31, 2012 so that this provision is no longer applicable. Transfers made to estates of decedents, gifts, or GST transfers are treated as if the amendments were never enacted.<a href="#_ftn2" name="_ftnref2">²</a> However, under 2010 TRA, the GST tax rate for 2010 was zero, 35 percent for 2011 and 2012 and 40 percent for 2013 and beyond. The GST exemption was $5.49 million in 2017, and was raised to $11.18 million in 2018, $11.4 million in 2019, $11.58 million in 2020, $11.7 million for 2021, $12.06 million for 2022, $12.92 million in 2023, $13.61 million in 2024 and $13.99 million in 2025 (projected) under the 2017 Tax Act.<a href="#_ftn3" name="_ftnref3">³</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.    IRC § 2604.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.    IRC §§ 2604(c), 2664, as added by EGTRRA 2001.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.    Rev. Proc. 2016-55, Pub. Law No. 115-97, Rev. Proc. 2018-18, Rev. Proc. 2018-57, Rev. Proc. 2019-44, Rev. Proc. 2020-45, Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34, Rev. Proc. 2024-40.<br /> <br /> </div>

<div class="Section1">In the case of a taxable distribution, the tax is paid by the transferee. In the case of a taxable termination or a direct skip from a trust, the tax is paid by the trustee. In the case of a direct skip (other than a direct skip from a trust), the tax is paid by the transferor. Unless the governing instrument of transfer otherwise directs, the GST tax is charged to the property constituting the transfer.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.    IRC § 2603.<br /> <br /> </div>

<div class="Section1">Where the basis of property subject to the GST tax is increased (or decreased) to fair market value because property transferred in a taxable termination occurs at the same time and as a result of the death of an individual, any increase (or decrease) in basis is limited by multiplying such increase (or decrease) by the inclusion ratio used in allocating the GST exemption.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.    IRC § 2654(a)(2).<br /> <br /> </div>

<div class="Section1">In the case of any direct skip which is a nontaxable gift, the inclusion ratio is zero. For this purpose, a nontaxable gift means any transfer of property to the extent the transfer is not treated as a taxable gift by reason of the gift tax annual exclusion (taking into account the split gift provision for married couples&ndash;see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="905">905</a>) or the &ldquo;qualified transfer&rdquo; exclusion (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="905">905</a>). In other words, there is no GST tax imposed on direct skip gifts that come within the gift tax annual exclusion or that are &ldquo;qualified transfers.&rdquo; However, with respect to transfers after March&nbsp;31, 1988, a nontaxable gift which is a direct skip to a trust for the benefit of an individual has an inclusion ratio of zero only if (1) during the life of such individual no portion of the trust corpus or income may be distributed to or for the benefit of any other person, and (2) the trust would be included in such individual&rsquo;s estate if the trust did not terminate before such individual<br /> died.<a href="#_ftn1" name="_ftnref1">¹</a><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp; IRC &sect; 2642(c).<br /> <br /> </div></div><br />

<div class="Section1">Yes. If a split gift is made for gift tax purposes (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="905">905</a>), such gift will be so treated for purposes of the GST tax.<a href="#_ftn1" name="_ftnref1">¹</a> Split gifts allow spouses to, in effect, utilize each other&rsquo;s annual exclusions and exemptions (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="876">876</a>). One memorandum permitted a taxpayer to elect after his spouse&rsquo;s death to split gifts with his spouse and thus take advantage of his spouse&rsquo;s GST tax exemption where the gifts were made by the taxpayer shortly before the spouse&rsquo;s death.<a href="#_ftn2" name="_ftnref2">²</a><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp; IRC &sect; 2652(a)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp; TAM 9404023.<br /> <br /> </div></div><br />

<div class="Section1">The person required to file the return is the person liable for paying the tax (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="891">891</a>). In the case of a direct skip (other than from a trust), the return must be filed on or before the due date for the gift or estate tax return with respect to the transfer. In all other cases, the return must be filed on or before the 15th day of the fourth month after the close of the taxable year of the person required to make the return.<a href="#_ftn1" name="_ftnref1">¹</a><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp; IRC &sect; 2662.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> A generation skipping transfer is a transfer to a person two or more generations younger than the transferor (called a &ldquo;skip person,&rdquo; see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="887">887</a> regarding generation assignments), and can take any one of three forms: (1) a taxable distribution; (2) a taxable termination; and (3) a direct skip. A trust is also a skip person if the trust can benefit only persons two or more generations younger than the transferor.<a href="#_ftn1" name="_ftnref1">¹</a> The GST tax was zero percent for one year in 2010 with a top 35 percent rate in 2011 and 2012.<a href="#_ftn2" name="_ftnref2">²</a> ATRA increased the maximum GST tax rate to 40 percent for tax years beginning after 2012.<a href="#_ftn3" name="_ftnref3">³</a><br /> <p style="text-align: center;"><strong>Transferor</strong></p><br /> A &ldquo;transferor,&rdquo; in the case of any property subject to the federal estate tax, is the decedent. In the case of any property subject to the federal gift tax, the transferor is the donor.<a href="#_ftn4" name="_ftnref4">⁴</a> Thus, to the extent that a lapse of a general power of appointment (including a right of withdrawal) is subject to gift or estate tax, the powerholder becomes the transferor with respect to such lapsed amount.<a href="#_ftn5" name="_ftnref5">⁵</a> Thus, a <em>Crummey</em> powerholder should not be treated as a transferor with respect to the lapse of a withdrawal power if the amount lapsing in any year is no greater than (1) $5,000, or (2) 5 percent of the assets out of which exercise of the power could be satisfied.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> If there is a generation-skipping transfer of any property and immediately after the transfer such property is held in trust, a different rule (the &ldquo;multiple skip&rdquo; rule) applies to subsequent transfers from that trust. In such case, the trust is treated as if the transferor (for purposes of subsequent transfers) were assigned to the first generation above the highest generation of any person having an &ldquo;interest&rdquo; (see below) in the trust immediately after the transfer.<a href="#_ftn7" name="_ftnref7">⁷</a> If no person holds an interest immediately after the GST, then the transferor is assigned to the first generation above the highest generation of any person in existence at the time of the GST who may subsequently hold an interest in the trust.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> For the effect of making a &ldquo;reverse QTIP election,&rdquo; see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="876">876</a>.<br /> <p style="text-align: center;"><strong>Direct Skip</strong></p><br /> A direct skip is a transfer subject to federal gift or estate tax to a skip person. However, with respect to transfers before 1998, such a transfer was not a direct skip if the transfer was to a grandchild of the transferor or of the transferor&rsquo;s spouse or former spouse, and the grandchild&rsquo;s parent who was the lineal descendant of the transferor or his spouse or former spouse was dead at the time of the transfer. In other words, a person could be stepped-up in generations because a parent who had been in the line of descent predeceased such person. This rule could be reapplied to lineal descendants below that of a grandchild. Persons assigned to a generation under this rule were also assigned to such generation when such persons received transfers from the portion of a trust attributable to property to which the step-up in generation rule applied.<a href="#_ftn9" name="_ftnref9">⁹</a> For purposes of this predeceased child rule, a living descendant who died no later than 90 days after a transferor was treated as predeceasing the transferor if he or she was treated as predeceased under the governing instrument or state law.<a href="#_ftn10" name="_ftnref10">¹⁰</a> For a discussion of the more expansive predeceased parent rule after 1997, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="887">887</a>.<br /> <br /> In some circumstances, whether a step-up in generation was available could depend on whether a QTIP or a reverse QTIP marital election was made for GSTT purposes (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="876">876</a>). If the parent of a grandchild-distributee died after the transfer by a grandparent to a generation-skipping trust, but before the distribution from the trust to the grandchild, and a reverse QTIP election had been made, the distribution was a taxable termination and the &ldquo;step-up in generation&rdquo; rule was not available. However, if the reverse QTIP election had not been made, the distribution was eligible for the &ldquo;step-up in generation&rdquo; exception from treatment as a direct skip and was not subject to GSTT.<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> Also, for purposes of the GST tax, the term &ldquo;direct skip&rdquo; did not include any transfer before January&nbsp;1, 1990 from a transferor to a grandchild of the transferor to the extent that the aggregate transfers from such transferor to such grandchild did not exceed $2 million. This $2 million exemption was available with respect to a transfer in trust only if (1) during the life of such individual no portion of the trust corpus or income could be distributed to or for the benefit of any other person, (2) the trust would be included in such individual&rsquo;s estate if such individual were to die before the trust terminated, and (3) all of the income of the trust had to be distributed at least annually to the grandchild once he reached 21. Requirement<br /> (3) applied only to transfers after June&nbsp;10, 1987. However, the Committee Report indicated that this requirement was not satisfied by a <em>Crummey</em> demand power.<a href="#_ftn12" name="_ftnref12">¹²</a><br /> <br /> The $2 million per grandchild exemption applied to transfers to grandchildren only; the step-up in generation rule for a predeceased parent did not apply. A transfer which would have been a direct skip were it not for the $2 million exemption was likewise exempted from being treated as a taxable termination or taxable distribution. However, the rules which apply to the taxation of multiple skips will apply to subsequent transfers from such trust.<br /> <p style="text-align: center;"><strong>Taxable Termination</strong></p><br /> A taxable termination occurs when an &ldquo;interest in property&rdquo; (see below) held in trust (or some arrangement having substantially the same effect as a trust) for a skip person is terminated by an individual&rsquo;s death, lapse of time, release of a power, or otherwise, unless either (1) a non-skip person has an interest in the trust immediately after such termination, or (2) at no time after the termination may a distribution be made from the trust to a skip person, other than a distribution the probability of which occurring is so remote as to be negligible (i.e., less than a 5 percent actuarial probability). If upon the termination of an interest in a trust by reason of the death of a lineal descendant of the transferor, a portion of the trust is distributed to skip persons (or to trusts for such persons), such partial termination is treated as taxable. If a transfer subject to estate or gift tax occurs at the time of the termination, the transfer is not a taxable termination (but it may be a direct skip).<a href="#_ftn13" name="_ftnref13">¹³</a><br /> <p style="text-align: center;"><strong>Taxable Distribution</strong></p><br /> A taxable distribution is any distribution from a trust to a skip person (other than a taxable termination or a direct skip).<a href="#_ftn14" name="_ftnref14">¹⁴</a><br /> <p style="text-align: center;"><strong>Generation-Skipping Transfer Exceptions</strong></p><br /> However, the following are not considered generation-skipping transfers:<br /> <p style="padding-left: 40px;">(1)&nbsp;&nbsp;&nbsp;&nbsp; Any transfer which, if made during life by an individual, would be a &ldquo;qualified transfer&rdquo; (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="905">905</a>); and</p><br /> <p style="padding-left: 40px;">(2)&nbsp;&nbsp;&nbsp;&nbsp; Any transfer to the extent (a) the property transferred was subject to a prior GST tax, (b) the transferee in the prior transfer was in the same generation as the current transferee or a younger generation, and (c) the transfers do not have the effect of avoiding the GST tax.<a href="#_ftn15" name="_ftnref15">¹⁵</a></p><br /> <p style="text-align: center;"><strong>Interest in Property</strong></p><br /> A person has an &ldquo;interest in property&rdquo; held in trust if (at the time the determination is made) such person&ndash;<br /> <p style="padding-left: 40px;">(1)&nbsp;&nbsp;&nbsp;&nbsp; has a present right to receive income or corpus from the trust (for example, a life income interest);</p><br /> <p style="padding-left: 40px;">(2)&nbsp;&nbsp;&nbsp;&nbsp; is a permissible current recipient of income or corpus from the trust (for example, a beneficiary entitled to distribution of income or corpus, but only in the discretion of the trustee) and is not a charitable organization (specifically, one described in IRC Section&nbsp;2055(a)); or</p><br /> <p style="padding-left: 40px;">(3)&nbsp;&nbsp;&nbsp;&nbsp; is such a charitable organization and the trust is a charitable remainder annuity trust (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8087">8087</a>), a charitable remainder unitrust (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8088">8088</a>), or a pooled income fund (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8096">8096</a>).</p><br /> In determining whether a person has an interest in a trust, the fact that income or corpus may be used to satisfy a support obligation is disregarded if such use is discretionary or made pursuant to the Uniform Gifts to Minors Act (or similar state statute). In other words, a parent is not treated as having an interest in a trust merely because the parent acts as guardian for a child. However, a parent would be treated as having an interest in the trust if support obligations are mandatory.<a href="#_ftn16" name="_ftnref16">¹⁶</a><br /> <br /> An interest may be disregarded if it is used <em>primarily</em> to postpone or avoid the GST tax.<a href="#_ftn17" name="_ftnref17">¹⁷</a> The regulations provide that an interest is disregarded if <em>a significant purpose</em> for the creation of the interest is the postponement or avoidance of the GST tax.<a href="#_ftn18" name="_ftnref18">¹⁸</a><br /> <p style="text-align: center;"><strong>Effective Date and Transitional Rules</strong></p><br /> The rules explained here and in the succeeding questions apply generally to any generation-skipping transfer (GST) made after October&nbsp;22, 1986. Also, any lifetime transfer after September&nbsp;25, 1985, and on or before October&nbsp;22, 1986, is treated as if made on October&nbsp;23, 1986. These rules will not, however, apply to the following:<br /> <p style="padding-left: 40px;">(1)&nbsp;&nbsp;&nbsp;&nbsp; Any GST under a trust that was irrevocable on September&nbsp;25, 1985, but only to the extent that such transfer is not made out of corpus (or income attributable to such corpus) added to the trust after September&nbsp;25, 1985;</p><br /> <p style="padding-left: 40px;">(2)&nbsp;&nbsp;&nbsp;&nbsp; Any GST under a will or revocable trust executed before October&nbsp;22, 1986, if the decedent died before January&nbsp;1, 1987; and</p><br /> <p style="padding-left: 40px;">(3)&nbsp;&nbsp;&nbsp;&nbsp; Any GST&ndash;</p><br /> <p style="padding-left: 80px;">(a)&nbsp; under a trust to the extent such trust consists of property included in the gross estate of a decedent (other than property transferred by the decedent during his life after October&nbsp;22, 1986), or reinvestments thereof, or</p><br /> <p style="padding-left: 80px;">(b)&nbsp; which is a direct skip that occurs by reason of the death of any decedent;</p><br /> but only if such decedent was, on October&nbsp;22, 1986, under a mental disability to change the disposition of his property and did not regain his competence to dispose of such property before the date of his death.<a href="#_ftn19" name="_ftnref19">¹⁹</a> It appears that Congress does not intend for the third grandfathering rule to apply with respect to property transferred after August&nbsp;3, 1990 to an incompetent person, or to a trust of such a person.<a href="#_ftn20" name="_ftnref20">²⁰</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&sect; 2611(a), 2613.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 2664.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; American Taxpayer Relief Act of 2012, Pub. Law No.&nbsp;112-240, &sect; 101.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 2652(a)(1).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 26.2652-1(a).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Let. Rul. 9541029.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 2653(a).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 26.2653-1.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 2612(c)(2), prior to amendment by TRA &rsquo;97.<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 26.2612-1(a)(2)(i).<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp;&nbsp;&nbsp; Rev. Rul. 92-26, 1992-2 CB 314.<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.&nbsp;&nbsp;&nbsp; TRA &rsquo;86, &sect; 1433(b)(3), as amended by TAMRA &rsquo;88, &sect; 1014(h)(3).<br /> <br /> <a href="#_ftnref13" name="_ftn13">13</a>.&nbsp;&nbsp;&nbsp; IRC &sect; 2612(a); Treas. Reg. &sect; 26.2612-1(b).<br /> <br /> <a href="#_ftnref14" name="_ftn14">14</a>.&nbsp;&nbsp;&nbsp; IRC &sect; 2612(b).<br /> <br /> <a href="#_ftnref15" name="_ftn15">15</a>.&nbsp;&nbsp;&nbsp; IRC &sect; 2611(b).<br /> <br /> <a href="#_ftnref16" name="_ftn16">16</a>.&nbsp;&nbsp;&nbsp; IRC &sect; 2652(c)(3).<br /> <br /> <a href="#_ftnref17" name="_ftn17">17</a>.&nbsp;&nbsp;&nbsp; IRC &sect; 2652(c)(2).<br /> <br /> <a href="#_ftnref18" name="_ftn18">18</a>.&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 26.2612-1(e)(2)(ii).<br /> <br /> <a href="#_ftnref19" name="_ftn19">19</a>.&nbsp;&nbsp;&nbsp; TRA &rsquo;86, &sect; 1433(a), (b), as amended by TAMRA &rsquo;88, &sect; 1014(h)(2).<br /> <br /> <a href="#_ftnref20" name="_ftn20">20</a>.&nbsp; OBRA &rsquo;90, &sect; 11703(c)(3).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> In general, the inclusion ratio with respect to any property transferred in a GST is the excess of one minus (a) the &ldquo;applicable fraction&rdquo; 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.<a href="#_ftn1" name="_ftnref1">¹</a>The &ldquo;applicable fraction&rdquo; 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.<a href="#_ftn2" name="_ftnref2">²</a><br /> <p style="padding-left: 40px;"><em>Example 1.</em> 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,<br /> 40 percent, is applied against the inclusion ratio, .319. The resulting percentage, 12.76 percent, is applied<br /> against the value of the property transferred, $20,000,000, to produce a GST tax of $2,552,000. The tax is<br /> paid by G, the transferor, because this is a direct skip (other than a direct skip from a trust) (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="875">875</a>).</p><br /> <p style="padding-left: 40px;"><em>Example 2.</em> Same facts as in preceding example, except that for federal gift tax purposes G&rsquo;s spouse consented to a split gift of the $20 million (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="888">888</a>). 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&rsquo;s spouse, the transferors, because each gift is a direct skip (other than a direct skip from a trust) (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="875">875</a>).</p><br /> <p style="padding-left: 40px;"><em>Example 3.</em> 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.</p><br /> <p style="padding-left: 40px;"><em>Example 4.</em> In 2023, G transfers $100,000 to a trust and allocates no GST exemption to the trust. If all the trust beneficiaries are grandchildren of G, G has made a direct skip fully subject to GST tax. The GST tax is $40,000 ($100,000 transfer &times; 40 percent GST tax rate) and is payable by G. If the trust beneficiaries are children and grandchildren of G, the trust has an inclusion ratio of one, and GST transfers are fully subject to tax at the GST tax rate at the time of any later transfer.</p><br /> If there is more than one transfer in trust the applicable fraction must be recomputed at the time of each transfer. Thus, if property is transferred to a preexisting trust, the &ldquo;recomputed applicable fraction&rdquo; is determined as follows: The numerator of such fraction is the sum of<br /> (1) the amount of the GST exemption allocated to the property involved in such transfer and (2) the nontax portion of the trust immediately before the transfer. (The nontax portion of the trust is the value of the trust immediately before the transfer multiplied by the applicable fraction in effect before such transfer.) The denominator of such fraction is the value of the trust immediately after the transfer 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).<a href="#_ftn3" name="_ftnref3">³</a><br /> <p style="padding-left: 40px;"><em>Example 5.</em> In the year 1995, G transfers irrevocably in trust for his children and grandchildren $4 million and allocates all his $1 million GST exemption to the transfer. The applicable fraction is 1,000,000/4,000,000, or .250. The inclusion ratio is 1 minus .250, or .750.</p><br /> <p style="padding-left: 40px;">In 2001, the trust makes a taxable distribution to the grandchildren of $100,000. The maximum estate tax rate, 55 percent in 2001, is applied against the inclusion ratio, .750. The resulting percentage, 41.25 percent, is multiplied by the $100,000 transfer, resulting in a GST tax of $41,250. GST taxes in this example are paid by the grandchildren, the transferees, because the transfers are taxable distributions (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="891">891</a>).</p><br /> <p style="padding-left: 40px;">In 2024, the trust makes a taxable distribution to the grandchildren of $100,000. The maximum estate tax rate, 40 percent, is applied against the inclusion ratio, .750. The resulting percentage, 30 percent, is multiplied by the $100,000 transfer, resulting in a GST tax of $30,000.</p><br /> <p style="padding-left: 40px;">Later in 2024, when the trust property has grown to $6 million, G transfers an additional $15 million to the trust. An additional $12,610,000 of GST exemption is available to G in 2024 ($13,610,000 GST exemption in 2024 minus $1,000,000 exemption already used). The numerator of the recomputed fraction is the value of the nontax portion of the trust immediately before the transfer, or $5.25 million (value of the trust, $21 million, multiplied by the applicable fraction of .250), plus $12,610,000 additional exemption, or $17,860,000. The denominator of the recomputed fraction is $21 million (the sum of the transferred property,<br /> $15 million, and the value of all the property in the trust immediately before the transfer, $6 million). The applicable fraction is 17,860,000/21,000,000, or .850. The inclusion ratio is 1 minus .850, or .15.</p><br /> <p style="padding-left: 40px;">Later in 2024, the trust makes a taxable distribution to the grandchildren of $100,000. The maximum estate tax rate, (40 percent), is applied against the inclusion ratio, .15. The resulting percentage, 6 percent, is multiplied by the $100,000 transfer, resulting in a GST tax of $6,000.</p><br /> <br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Trusts are usually created with an inclusion ratio of either one (GST transfers, if any, with respect to trust are fully taxable) or zero (fully exempt from GST tax). A trust has an inclusion ratio of zero if GST exemption is allocated to any transfer to the trust that is not a nontaxable gift (an allocation of GST exemption is not needed for a direct skip nontaxable gift (see below); it has an inclusion ratio of zero). For information on severing a trust to create separate trusts with inclusion ratios of zero and one, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="883">883</a>.<br /> <br /> <hr><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp; &sect; 2642(a)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp; IRC &sect; 2642(a)(2), Treas. Reg. &sect; 26.2642-1.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp; IRC &sect; 2642(d)(2), Treas. Reg. &sect; 26.2642-4.<br /> <br /> </div></div><br />

<div class="Section1">In general, portions of a trust are not to be treated as separate trusts. However, portions attributable to different transferors, substantially separate and independent shares of different beneficiaries of a trust, and trusts treated as separate trusts under state law are to be treated as separate trusts for GST tax purposes.<a href="#_ftn1" name="_ftnref1">¹</a> However, treatment of a single trust as separate shares for purposes of the GST tax does not permit treatment as separate trusts for purposes of filing or payment of tax, or for purposes of any other tax. Additions to, or distributions from, such a trust are allocated pro-rata among all shares unless expressly provided otherwise. In general, a separate share is not treated as such unless it exists at all times from and after creation of the trust.</div><br /> <div class="Section1"><br /> <br /> Trusts created from a qualified severance are treated as separate trusts for GST tax purposes, effective for 2001 to 2009 and for tax years beginning after 2010. A qualified severance means the division of a single trust into two or more trusts under the trust document or state law if (1) the single trust is divided on a fractional basis, and (2) in the aggregate, the terms of the new trusts provide for the same succession of interests of beneficiaries as are provided in the original trust. In the case of a trust with a GST inclusion ratio of greater than zero and less than one (i.e., the trust is partially protected from the GST by allocations of the GST exemption), a severance is a qualified severance only if the single trust is divided into two trusts, one of which receives a fractional amount equal to the GST applicable fraction multiplied by the single trust’s assets. The trust receiving the fractional amount receives an inclusion ratio of zero (i.e., it is not subject to GST tax), and the other trust receives an inclusion ratio of one (i.e., it is fully subject to GST tax).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Otherwise, severance of a trust included in the taxable estate (or created in the transferor’s will) into single shares will be recognized for GST purposes if (1) the trusts are severed pursuant to the governing instrument or state law, (2) such severance occurs (or a reformation proceeding is begun and is indicated on the estate tax return) prior to the date for filing the estate tax return (including extensions actually granted), and (3) the trusts are funded using (a) fractional interests or (b) pecuniary amounts for which appropriate adjustments are made.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> Regulations provide that a qualified severance must be done on a fractional or percentage basis; a severance based on a specific pecuniary amount is not permitted. The terms of the new trusts must provide in the aggregate for the same succession of beneficiaries. With respect to trusts from which discretionary distributions may be made on a non pro rata basis, this requirement can be satisfied even if each permissible beneficiary might be a beneficiary of only one of the separate trusts, but only if no beneficial interest is shifted to a lower generation and the time for vesting of any beneficial interest is not extended.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> The regulations provide that the separate trusts must be funded with property from the severed trust with either a pro rata portion of each asset or on a non pro rata basis. If funded on a non pro rata basis, the separate trusts must be funded by applying the appropriate severance fraction or percentage to the fair market value of all the property on the date of severance. The date of severance is either the date selected by the trustee or a court-imposed date of funding. The funding of the separate trusts must commence immediately, and occur within a reasonable period of time (not more than 90 days) after the date of severance.<br /> <br /> A qualified severance is deemed to occur before a taxable termination or a taxable distribution that occurs by reason of the qualified severance. For example, a trust provides for trust income to be paid annually to grantor’s child (C) and grandchild (GC) for 10 years, remainder to C and GC or their descendants. If either dies during the trust term, income is payable to that person’s then-living descendants. The inclusion ratio for the trust is .50. The trust is severed into one trust for C and C’s descendants and one for GC and GC’s descendants. The trustee designates the trust for C as having an inclusion ratio of one, and the trust for GC as having an inclusion ratio of zero. The severance causes either a taxable termination of C’s interest in, or a taxable distribution to, GC’s trust (which is a skip person). However, the severance is deemed to occur before the GST and GC’s trust has an inclusion ratio of zero; therefore, there is no GST tax due.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> A trust that is partly grandfathered from GST tax can be severed into a grandfathered and a nongrandfathered trust under these rules.<br /> <br /> Regulations provide that, for purpose of funding the separate trusts, assets must be valued without taking into consideration any discount or premium arising from the severance.<a href="#_ftn6" name="_ftnref6">⁶</a> For example, if the severance creates a minority interest when the separate trust receives less than the interest owned by the original trust, such a minority discount is disregarded for funding purposes.<br /> <br /> Regulations provide that, with respect to a qualified severance of a trust with an inclusion ratio that is greater than zero and less than one, one or more resulting trusts must be funded with an amount equal to the GST applicable fraction (used to determine the GST inclusion ratio for the original trust immediately before the severance) times the value of the original trust on the date of severance. Each such resulting trust receives an inclusion ratio of zero. All other resulting trusts receive an inclusion ratio of one. If two or more trusts receive an amount equal to the applicable fraction of the original trust, the trustee can select which of the resulting trusts has an inclusion ratio of zero, and which has the inclusion ratio of one. For example, if the original trust has an applicable percentage of .50 and the trust is severed into two trusts, the trustee can select which of the two resulting trusts has an inclusion ratio of zero, and which has an inclusion ratio of one.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> Regulations also provide that, where a trust is severed and the severance is not qualified, the resulting trusts each receive an inclusion ratio equal to the inclusion ratio of the original trust.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> Further, as provided in the regulations, for purposes of the requirements that a separate share is not treated as such unless it exists at all times from and after creation of the trust, a trust is treated as created on the date of death of the grantor if the trust is fully includable in the gross estate of the grantor for estate tax purposes. Also, if the trust document requires the mandatory severance of a trust upon the occurrence of an event (not within the discretion of any person), the resulting trusts will be treated as separate trusts for GST tax purposes. The resulting trusts each receive an inclusion ratio equal to the inclusion ratio of the original trust.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> The advantage of having portions or shares of a trust treated as separate trusts is that the transferor can decide whether or not to allocate a portion of his GST tax exemption to each separate trust and the trustee can make distributions from the separate trusts in a way that minimizes GST tax.<br /> <br /> <hr /><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.    IRC § 2654(b).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.    IRC § 2642(a), as added by EGTRRA 2001.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.    Treas. Reg. § 26.2654-1.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.    Treas. Reg. § 26.2642-6.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.    Treas. Reg. § 26.2642-6(j), Ex. 8.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.    Treas. Reg. § 26.2642-6(d)(4).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.    Treas. Reg. § 26.2642-6(d)(7).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.    Treas. Reg. § 26.2642-6(h).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.    Treas. Reg. § 26.2654-1(a).<br /> <br /> </div>