[Federal Register Volume 60, Number 248 (Wednesday, December 27, 1995)]
[Rules and Regulations]
[Pages 66898-66926]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30873]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 26, 301, and 602
[TD 8644]
RIN 1545-AJ11; 1545-AL75; 1545-AO89
Generation-Skipping Transfer Tax
AGENCY: Internal Revenue Service, Treasury.
ACTION: Final and temporary regulations.
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SUMMARY: This document contains final generation-skipping transfer
(GST) tax regulations under chapter 13 of the Internal Revenue Code
(Code), as added by section 1431 of the Tax Reform Act of 1986. Changes
to the applicable law were made by the Tax Reform Act of 1986, the
Technical and Miscellaneous Revenue Act of 1988, and the Revenue
Reconciliation Act of 1989. The regulations are necessary to provide
guidance to taxpayers so that they may comply with chapter 13 of the
Code.
EFFECTIVE DATE: December 27, 1995.
FOR FURTHER INFORMATION CONTACT: James F. Hogan, (202) 622-3090 (not a
toll free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information requirements contained in these final
regulations have been reviewed and approved by the Office of Management
and Budget in accordance with the Paperwork Reduction Act (44 U.S.C.
3507) under control numbers 1545-0985 (relating to Secs. 26.2601-1 and
26.2662-2) and 1545-1358 (relating to Secs. 26.2632-1, 26.2642-1,
26.2642-2, 26.2642-3, 26.2642-4 and 26.2652-2). All of these paperwork
requirements will be consolidated under control number 1545-0985.
Responses to this collection of information are required to ensure the
proper collection of the generation-skipping transfer tax.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection unless the collection of information
displays a valid control number.
The estimated burden per respondent is 1 hour under control number
1545-0985. The time estimates for the reporting and recordkeeping
requirements under control number 1545-1358 are included in the
estimates of burden applicable to Forms 706, 706NA, 706GS(T), 706GS(D),
706GS(D-1), and 709.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be directed to the Internal
Revenue Service, Attn: IRS Reports Clearance Officer T:FP, Washington,
DC 20224, and to the Office of Management and Budget, Attn: Desk
Officer for the Department of Treasury, Office of Information and
Regulatory Affairs, Washington, DC 20503.
Books or records relating to this collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
On March 15, 1988, the IRS published in the Federal Register a
notice of proposed rulemaking (53 FR 8469) by cross reference to
Temporary Regulations published on the same date in the Federal
Register (53 FR 8441) under Secs. 2601 and 2662. Subsequently, on
December 24, 1992, the IRS published a second notice of proposed
rulemaking (57 FR 61353) amending the prior notice. Also, on December
24, 1992, the IRS published a notice of proposed rulemaking in the
Federal Register (57 FR 61356) containing proposed regulations under
Secs. 2611, 2612, 2613, 2632, 2641, 2642, 2652, 2653, 2654, and 2663.
The IRS received written and oral comments on the proposed regulations
and, on April 21, 1993, a public hearing was held. These documents
adopt final regulations with respect to these notices of proposed
rulemaking.
The following is a discussion of the more significant revisions
that were made.
Section 2601--Transitional Rules
Transfers After September 25, 1985 and Before October 23, 1986
Section 26.2601-1(a)(2)(i), relating to inter vivos transfers made
after September 25, 1985, and before October 23, 1986, clarifies that
chapter 13 applies to inter vivos transfers that are subject to chapter
12 even though a gift tax is not actually paid because of, for example,
the marital deduction or the unified credit.
Section 26.2601-1(a)(2)(ii) (which treats inter vivos transfers
made after September 25, 1985, and before October 23, 1986, as if made
on October 23, 1986) clarifies that the value of the transferred
property for purposes of chapter 13 is determined as of the actual
transfer date rather than as of the deemed transfer date of October 23,
1986.
Section 26.2601-1(a)(4) adds an example illustrating that
Sec. 26.2601-1(a)(2) does not apply to transfers made under a revocable
trust that becomes irrevocable by reason of the grantor's death after
September 25, 1985, but before October 23, 1986. Those transfers are
not subject to chapter 13 because they are in the nature of
testamentary transfers that occurred prior to October 23, 1986.
Section 26.2601-1(b)(1)(ii)(C) clarifies that incidents of
ownership in an insurance policy that are relinquished before September
25, 1985, are not to be taken into account in determining whether a
trust is irrevocable for purposes of Sec. 26.2601-1(b)(1), which
exempts trusts that were irrevocable on September 25, 1985, from the
provisions of chapter 13.
Under Sec. 26.2601-1(b)(1)(iii)(A), a qualified terminable interest
property (QTIP) trust that is grandfathered under Sec. 26.2601-1(b)(1)
is treated as if the reverse QTIP election had been made under section
2652(a)(3). Example 1 in Sec. 26.2601-1(b)(1)(iii)(B) has been revised
to illustrate that the initial QTIP election under section 2523(f) need
not be made before September 25, 1985, provided that the trust was
irrevocable on that date. Further, Sec. 26.2601-1(b)(1)(v)(C) has been
revised to provide that in the case of a trust with respect to which a
reverse QTIP election is deemed to have been made, the failure to
exercise the right of reimbursement under section 2207A will not be
treated as a constructive addition to the trust. This conforms the
treatment of trusts that are irrevocable on September 25, 1985, with
the rule provided in Sec. 26.2652-1(a)(3) which applies to trusts
created after September 25, 1985.
[[Page 66899]]
In Sec. 26.2601-1(b)(2)(iv)(B), the phrase ``or to a generation-
skipping trust'' has been added to eliminate any implication that the
provision is limited to situations involving direct skips. The
provision applies to all generation-skipping transfers.
Section 26.2601-1(b)(3)(iii) applies the transitional rules where
the decedent was under a mental disability but had not been adjudged a
mental incompetent. This section has been clarified to provide that any
evidence submitted to establish the decedent's state of incompetency is
not conclusive and is subject to examination. In addition, an example
has been added to illustrate the transitional rules applicable in the
case of mental incompetency.
Uniform Statutory Rule Against Perpetuities
The notice of proposed rulemaking published on December 24, 1992,
(57 FR 61353) contained a proposed modification to Sec. 26.2601-
1(b)(1)(v)(B)(2). Section 26.2601-1(b)(1)(v)(B)(2) provided that the
exercise of a nongeneral power of appointment will not be treated as an
addition to a grandfathered GST trust if the power is exercised in a
manner that may not postpone or suspend the vesting, absolute
ownership, or power of alienation of a interest in property for a
period, measured from the date of creation of the trust, extending
beyond any life in being at the date of creation of the trust plus a
period of 21 years (perpetuities period).
The proposed modification to Sec. 26.2601-1(b)(1)(v)(B)(2), which
is finalized in this document, provides that the exercise of a
nongeneral power of appointment that validly postpones or suspends the
vesting, absolute ownership, or power of alienation of an interest in
property for a term of years that will not exceed 90 years (measured
from the date of creation of the trust) will not be considered an
exercise that postpones vesting, etc., beyond the perpetuities period.
The modification takes into account the fact that many states have
adopted the Uniform Statutory Rule Against Perpetuities (USRAP) which
allows either a 90 year perpetuities period or the common law
perpetuities period. Under Sec. 26.2601-1(b)(1)(v)(B)(2), as modified,
the nongeneral power may not be exercised in a manner that postpones
vesting, etc., for the longer of 90 years or the common law period
(lives in being plus 21 years).
The discussion in the preamble published on December 24, 1992,
indicates that USRAP has a ``wait and see'' aspect that is not
appropriate for GST purposes because it will be necessary to determine
the GST tax consequences of distributions and terminations at the time
they occur. Thus, the preamble stated that, in order to comply with the
regulation and avoid a constructive addition, it must be clear at the
time the nongeneral power is exercised that the exercise may not
postpone or suspend vesting, etc., beyond either lives in being plus 21
years or 90 years (but not the longer of the two periods). A
commentator has pointed out that the USRAP invalidates any attempt to
exercise a power for the longer of the two periods. Under the USRAP, it
will be clear at the time the nongeneral power is exercised that the
exercise may not postpone or suspend vesting, etc., beyond one of the
two periods (but not both). Under the USRAP, the common law period
(lives in being plus 21 years) is imposed in the event that the power
holder exercises the power in a manner that attempts to suspend or
postpone vesting, etc., for the longer of the two periods. Although the
preamble published on December 24, 1992, may have been misleading in
referring to a ``wait and see'' aspect of USRAP, the modification to
Sec. 26.2601-1(b)(1)(v)(B)(2) is not affected.
Section 2611 et. seq.--GST Substantive Rules
Definition of Generation-Skipping Transfers
Section 26.2611-1 has been revised to clarify that, in determining
whether an event is subject to the GST tax, reference must be made to
the most recent transfer that was subject to Federal estate or gift
tax. This is because the most recent transfer that was subject to
estate or gift tax establishes the identity of the transferor, which in
turn determines the identity of the skip persons and non-skip persons.
Definitions
Section 26.2612-1(a)(2)(i) of the proposed regulations provides
generally that, for purposes of determining whether a transfer
constitutes a direct skip, the generation assignment of a person who
would otherwise be a skip person is redetermined by disregarding the
intervening generation, if certain individuals have died prior to the
transfer (e.g., a predeceased child of the transferor). The section has
been modified to provide that, if an individual who is a member of the
intervening generation dies no later than 90 days after the transfer,
the deceased individual is treated as having predeceased the
transferor, if the governing instrument or applicable state law
provides for such treatment.
Section 26.2612-1(a)(2)(ii) has been added to provide that, if a
transferor makes an addition to an existing trust after the death of an
individual described in paragraph (a)(2)(i) of that section (i.e., an
individual in the intervening generation), the additional property is
treated as being held in a separate trust for purposes of chapter 13.
Section 2612(a)(1) defines the term taxable termination to mean the
termination of an interest in property held in trust unless, among
other things, at no time after such termination may a distribution
(including distributions on termination) be made from the trust to a
skip person. Section 26.2612-1(b)(1)(iii), as proposed, has been
revised to provide that, for purposes of applying this rule, potential
distributions to skip persons are to be disregarded if the probability
of occurrence is so remote as to be negligible. A similar rule has been
applied to Sec. 26.2612-1(d)(2), regarding when a trust is considered a
skip person. The probability that a distribution will occur is so
remote as to be negligible only if it can be ascertained by actuarial
standards that there is less than a 5 percent probability that the
distribution will occur.
Section 26.2612-1(c)(2) has been added to clarify that the look-
through rule in section 2651(e)(2) does not apply for purposes of
determining whether a transfer from one trust to another trust is a
taxable distribution. Thus, the transfer is treated as having been made
to the recipient trust rather than to the beneficiaries of that trust.
Accordingly, a transfer is a taxable distribution only if the recipient
trust itself is a skip person.
Section 26.2612-1(e)(3) has been added to provide that, in
determining whether a trust is a skip person, trust interests
disclaimed pursuant to a qualified disclaimer described in section 2518
are not taken into account.
Example 3 has been added to Sec. 26.2612-1(f) to illustrate that a
transfer to a trust pursuant to which a beneficiary who is a skip
person has a withdrawal power is not a direct skip unless the trust is
a skip person.
Example 9 has been added to Sec. 26.2612-1(f) to illustrate that a
taxable termination may occur upon the distribution of the entire trust
property (less amounts retained to pay a resulting GST tax and
administration expenses).
Example 14 contained in Sec. 26.2612-1(f) of the proposed
regulations illustrates that an individual is not treated as having an
interest in a trust
[[Page 66900]]
for purposes of Chapter 13, if the individual's support obligation
could be satisfied at the discretion of the trustee. This example has
been renumbered as Example 15 and has been clarified to provide that an
individual will have an interest in the trust if the trustee is
required to make distributions for the beneficiary's support, in
satisfaction of the individual's support obligation.
Allocation of GST Exemption
Under Sec. 26.2632-1(b)(2)(ii)(A) of the proposed regulations, a
late allocation of GST exemption is effective on the date the Form 709
reporting the allocation is filed, and is deemed to precede in point of
time any taxable event occurring on that date. This section has been
revised to specify that the Form 709 is treated as filed on the date it
is mailed to the appropriate IRS Service Center. Further, the late
allocation may be made on a timely filed Form 709 reporting another
transfer.
Section 26.2632-1(b)(2)(ii)(B) has been added to clarify how the
GST exemption allocated on a Federal gift tax return (Form 709) is to
be apportioned in the event that the amount allocated on the return
exceeds the value of the transfers reported on the return.
Example 4 of Sec. 26.2632-1(b)(2)(iii) of the proposed regulations
has been revised to better illustrate the effective date of a late
allocation of GST exemption.
Example 5 of Sec. 26.2632-1(b)(2)(iii) has been added to illustrate
the automatic allocation of GST exemption to inter vivos direct skips
in situations where split gift treatment is elected on an initial gift
tax return filed after its due date.
Section 26.2632-1(d)(1) has been revised to provide that a late
allocation of GST exemption made by an executor with respect to an
inter vivos transfer not included in the gross estate, is effective as
of the date the allocation is filed. This rule does not apply to any
automatic allocation under section 2632(b)(1). This revision conforms
the regulation to section 2642(b)(3).
Estate Tax Inclusion Period
As proposed, Sec. 26.2632-1(c)(2)(ii) provided that an estate tax
inclusion period (ETIP) exists during the period in which the
transferred property would have been includible in the transferor's
gross estate had the transferor retained an interest held by the
transferor's spouse, but only to the extent the spouse acquired the
interest from the transferor in an inter vivos transfer that was not
included in the transferor's taxable gifts or for which a deduction was
allowed under section 2523. Commentators stated that there was no
support in the statute for this spousal rule, and any such rule would
require a legislative change. The final regulations eliminate this
spousal rule and Example 5 of Sec. 26.2632-1(c)(5).
Section 26.2632-1(c)(2)(ii)(A) has been added to provide that the
ETIP rules do not apply when the possibility that the property will be
included in the gross estate of the transferor (or the transferor's
spouse) is so remote as to be negligible.
Further, Sec. 26.2632-1(c)(2)(ii)(B) has been added to provide that
transferred property will not be treated as being subject to inclusion
in the transferor's spouse's gross estate, and thus, subject to an
ETIP, where the only power possessed by the spouse is a right to
withdraw no more than the greater of 5 percent or $5,000 of the trust's
corpus and the withdrawal right terminates within 60 days of the
transfer to the trust.
Section 26.2632-1(c)(5) Example 3, of the proposed regulations
illustrates that if a transferor's spouse elects gift-splitting
treatment with respect to the transferor's gift that is subject to an
ETIP, the spouse is treated as the transferor of one-half of the gift.
The example has been expanded to illustrate that, since the spouse's
deemed transfer is subject to an ETIP, if the spouse dies prior to the
termination of the trust, the spouse's executor may allocate GST
exemption to the trust. However, the allocation will not be effective
until the ETIP terminates on the transferor's death.
Erroneous Allocations
Under the proposed regulations, allocations in excess of the amount
of the property transferred are void. This treatment has been expanded
under the final regulations. Thus, any allocation to a trust that has
no GST potential at the time of the allocation, with respect to the
transferor for whom the allocation is made, is also void. This
provision is intended to prevent the wasting of GST exemption because
of an erroneous allocation with respect to a testamentary or inter
vivos transfer. A trust will have no GST potential only if there is no
possibility that a GST will be made from the trust with respect to the
transferor.
Determination of Applicable Fraction
Section 26.2642-1(b)(2) of the proposed regulations provided rules
for determining the inclusion ratio with respect to a trust subject to
an ETIP where GSTs are made from the trust during the ETIP. Comments
were received that the rules were unclear regarding whether an
ineffective allocation, i.e., an allocation made prior to any
distributions or terminations, would apply in determining the amount of
the transferor's unused GST exemption, or whether such an allocation
could be modified prior to an ETIP termination. In response to the
comments, Sec. 26.2632-1(c)(1) (providing rules for the allocation of
exemption with respect to a trust subject to an ETIP) and Sec. 26.2642-
1(b)(2) clarify that an allocation made to a trust subject to an ETIP
prior to any distribution or termination is not subject to modification
or revocation. However, the allocation will not be effective, i.e., the
allocation does not operate to fix the inclusion ratio of the trust, at
the time it is made. Rather, the allocation becomes effective as of the
date of a subsequent distribution or termination. Section 26.2632-
1(c)(5) Example 2, illustrates this point.
Section 26.2642-2 of the proposed regulations provides valuation
rules for determining the denominator of the applicable fraction under
section 2642. Section 26.2642-2(a)(1) of the final regulations
specifies that, in the case of a timely allocation of GST exemption
with respect to an inter vivos transfer, the denominator of the
applicable fraction is the fair market value of the transferred
property, as finally determined for gift tax purposes.
Section 26.2642-2(b)(1) of the proposed regulations provides
special rules for determining the denominator of the applicable
fraction in situations involving property subject to the special
valuation rules contained in section 2032A. Under the proposed
regulations, the special use value of the property could only be used
in determining the applicable fraction if the property was transferred
in a direct skip. Thus, a generation-skipping trust to which section
2032A property was transferred in a transfer that was not a direct skip
would not receive the benefit of the favorable valuation rules of
section 2032A in determining the applicable fraction with respect to
the trust.
Comments stated that the proposed regulation was inconsistent with
section 2642(b), which provides that the chapter 11 value must be used
to determine the applicable fraction in the case of a testamentary
transfer. Under the final regulations, the section 2032A value of
property is to be used to determine the applicable fraction for a
direct skip transfer and for a generation-skipping trust created in a
transfer other than a direct skip.
In the event that additional estate tax is imposed under section
2032A(c) with respect to the property, then the
[[Page 66901]]
applicable fraction is redetermined as of the transferor's date of
death. Thus, the GST tax liability with respect to any direct skip,
taxable termination, or taxable distribution occurring prior to the
recapture event would be recomputed based on the redetermined
applicable fraction, and an additional GST tax would be due. The
taxation of any future GST transfers would also be based on the
redetermined applicable fraction.
Sections 26.2642-2(b) (2) and (3) of the proposed regulations
contain special rules for determining the denominator of the applicable
fraction in situations involving residuary and pecuniary payments.
Generally, in the case of a residual GST after the payment of a
pecuniary amount, the denominator of the applicable fraction will be
the estate tax value of the total assets available to satisfy the
pecuniary payment less the amount of the pecuniary payment, provided
the pecuniary payment carries ``appropriate interest'' as defined in
Sec. 26.2642-2(b)(4). Under Sec. 26.2642-2(b)(4)(ii), the payment need
not carry appropriate interest if, inter alia, the payment is
irrevocably ``set aside'' within 15 months of the transferor's death.
The final regulations clarify that this exception to the appropriate
interest requirement applies only if the entire payment is set aside.
Further, the payment is treated as set aside if the amount is
segregated and held in a separate account pending distribution.
Finally, under the proposed regulation, the appropriate interest
requirement can be satisfied if a pro rata share of estate income is
allocated to the pecuniary bequest. The final regulations clarify that
the payment of income may be allocated pursuant to the terms of the
governing instrument or applicable local law.
Section 26.2642-4(a)(3) of the proposed regulations addresses a
situation where a lifetime allocation is made with respect to a trust
when the trust was not subject to an ETIP, and the trust is
subsequently included in the transferor's gross estate. The regulation
has been revised to provide that, if additional GST exemption is
allocated to the trust, the nontax portion of the trust is determined
immediately after the date of the transferor's death. Also, if
additional GST exemption is not allocated to the trust by the
transferor's executor, the applicable fraction does not change, if the
trust was not otherwise subject to an ETIP at the time the previous
allocation of GST exemption was made. Further, where such property is
included in the gross estate, the denominator of the applicable
fraction is reduced to reflect any federal or state estate or
inheritance tax paid by the trust.
Definition of Transferor
Section 26.2652-1(a)(1) of the proposed regulations, defining
transferor, has been revised to specify that a surviving spouse is
treated as the transferor of a qualified domestic trust (QDOT)
described in section 2056A that is included in the surviving spouse's
gross estate for federal estate tax purposes, assuming the trust is not
subject to a reverse QTIP election under section 2652(a)(3). The
surviving spouse is also the transferor of any QDOT created by the
surviving spouse under section 2056(d)(2)(B).
Section 26.2652-1(a)(4), as proposed, provided that the creator of
a special power of appointment will be treated as making a transfer
subject to estate or gift tax (and thus be considered a transferor) if
the holder of the power exercised the power in a manner that may
postpone vesting, etc., of the property subject to the power beyond the
permissible perpetuities period. This result is inconsistent with
section 2041(a)(3), which treats the holder of the power as making a
transfer under these circumstances. Accordingly, the regulation has
been revised to provide that the holder of the power will be treated as
making a taxable transfer, if the holder exercises the power in the
manner prescribed.
Section 26.2652-1(a)(5) has been added to specify that where a
donor's spouse consents to have the donor's gift treated as made one-
half by the spouse, then for purposes of chapter 13, the spouse is
treated as the transferor of one-half of the property transferred by
the donor. Thus, if a donor transfers property to a trust and retains a
qualified interest as defined in section 2702(b), with the remainder to
a grandchild, a consenting spouse would be treated as the transferor of
one-half the entire property. It was suggested that the spouse should
only be treated as the transferor of that portion of the trust
corresponding to one-half of the actuarial value of the interest
passing to the grandchild, since under section 2513, only one half the
gift to the grandchild may be treated as made by the consenting spouse.
However, treating the consenting spouse as the transferor of one-half
of the entire trust is consistent with the general treatment accorded
other split-interest transfers. For example, if a transferor
transferred property in trust retaining an interest that qualified
under section 2702(b), with the remainder to the transferor's
grandchild, the transferor would be considered the transferor of the
entire trust for purposes of chapter 13, notwithstanding that, from a
technical standpoint, only the actuarial value of the gift to the
grandchild is subject to gift tax at the time of the transfer.
Example 8 in Sec. 26.2652-1(a)(6) has been added illustrating that
a surviving spouse will not be treated as making a contribution to a
QTIP trust that is included in the spouse's gross estate and is subject
to a reverse QTIP election, where the spouse directs in the will that
the estate tax generated by the inclusion of the trust is to be paid
from the spouse's probate estate.
Separate Shares Treated as Separate Trusts
Section 26.2654-1 of the proposed regulations provides rules under
which ``separate shares'' of a single trust that satisfy the
requirements of the regulations will be recognized as separate trusts
for GST purposes.
Under the proposed regulations, a mandatory payment of a pecuniary
amount is treated as a separate share of a trust (and thus, a separate
trust for GST purposes) if certain conditions are satisfied. The
section is clarified to specify that a mandatory payment is a payment
that is nondiscretionary and noncontingent; i.e., the payment must be
made in all events.
A sentence was added to Example 3, now contained in Sec. 26.2654-
1(a)(5), to clarify that, where a decedent's probate estate pours over
to a revocable trust, and then amounts are distributed pursuant to the
terms of the trust, the distributions will be treated as separate
shares for purposes of chapter 13.
Example 4, now contained in Sec. 26.2654-1(a)(5), has been revised
to specify that the bequest of a pecuniary amount payable in kind is
not treated as a separate share of the trust, since, under the facts
presented, neither the trust nor local law requires that the assets
distributed in satisfaction of the bequest fairly reflect net
appreciation and depreciation. This is the result regardless of whether
the assets are distributed within 15 months of the transferor's death.
Comments received suggested that the regulations should allow
separate trust treatment whenever a single inter vivos trust was
recognized as separate trusts under local law. For example, an inter
vivos trust provides income to child for life, but when each grandchild
reaches age 35, a separate trust is to be established for the child,
the grandchild, and the grandchild's issue. Comments suggested that the
Service should recognize each trust established when a grandchild
reaches age 35 as a separate trust, and allow a late allocation of GST
[[Page 66902]]
exemption specifically to that trust when severance occurs.
This suggestion was rejected. Generally, the adoption of this
approach would effectively allow the allocation of GST exemption to
specific distributions from a GST trust, rather than to the entire
trust. This result would be contrary to the clear language of the
statute. See, e.g., sections 2642(a)(1)(A) and (a)(2).
Division of a Single Trust Into Separate Trusts
Under Sec. 26.2654-1(c) of the proposed regulations, a testamentary
trust could be severed into several parts, provided the severance was
commenced prior to the filing of the estate tax return. Further, the
new trusts created pursuant to the severance had to be identical to the
old trusts. For example, a testamentary trust providing for income to
spouse, remainder to be divided equally between child and grandchild
could only be severed into two trusts both providing income to spouse
with the remainder to be divided between child and grandchild. Finally,
an inter vivos trust could not be severed unless it consisted of
separate shares, or different transferors had contributed to the trust.
The regulation has been clarified to specify that the division of a
single trust that is included in the transferor's gross estate will be
recognized if either: (1) The single trust consists of separate shares
and is thus, treated as separate trusts; or (2) the single trust,
although not consisting of separate shares, is severed into separate
trusts pursuant to a direction in the governing instrument providing
that the trust is to be divided into separate trusts on the
transferor's death; or (3) the governing instrument does not require or
direct severance but the trust is severed pursuant to the discretionary
authority of the trustee granted under the governing instrument or
local law.
The final regulations provide that the trusts resulting from the
severance of a single testamentary trust need not be identical. Thus,
if the trust provides income to spouse, remainder to child and
grandchild, the trust may be severed to create two trusts, one with
income to spouse, remainder to child and a second with income to spouse
remainder to grandchild. This result could be achieved through proper
estate planning in any event. However, the regulations make it clear
that the resulting trusts must provide for the same succession of
interests as provided for under the original trusts. Thus, a trust
providing for an income interest to a child, with remainder to a
grandchild, could not be divided into one trust for the child (equal in
value to the child's income interest) and another for the grandchild.
The proposed regulations provided that the new trusts must be
funded with a fractional share of each and every asset held by the
original single trust. The provision has been revised to provide that
the new trusts may also be funded on a nonpro rata basis, based on the
fair market value of the assets selected on the date of severance.
Thus, the executor or trustee may select the assets with which to fund
each trust, and need not fractionalize each asset.
An example has been added to illustrate that, if a revocable trust
included in the transferor's gross estate is, under the terms of the
trust, divided into multiple trusts on the transferor's death, then
each trust established will be treated as a separate trust for GST
purposes.
Due Date of Return
New Sec. 26.2662-1(d)(2) has been added to provide that the due
date of the return with respect to a taxable termination subject to an
election under section 2624(c) (relating to alternate valuation in
accordance with section 2032) is April 15th of the following year in
which the taxable termination occurred or on or before the 15th day of
the tenth month following the month in which the death that resulted in
the taxable termination occurred, whichever is later.
Application of Chapter 13 to Nonresident Aliens
Section 2663(2) requires that the Commissioner prescribe
regulations, consistent with the provisions of chapters 11 and 12,
providing for the application of the GST tax to a nonresident alien
(NRA). In general, under Sec. 26.2663-2(b) as proposed, the GST tax
applied to inter vivos and testamentary direct skip transfers by a NRA,
to the extent that the transferred property was U.S. situs property
such that the transfer was subject to a gift tax (in the case of inter
vivos transfers) or an estate tax (in the case of testamentary
transfers). Similarly, in the case of transfers in trust, chapter 13
applied to taxable terminations and distributions to the extent the
initial transfer to the trust (whether inter vivos or testamentary)
consisted of U.S. situs property, such that the initial transfer was
subject to the gift or estate tax. This was the case regardless of the
situs of the property at the time of the actual distribution or
termination and regardless of the residency or citizenship of the skip
person receiving the beneficial interest or property.
Under Sec. 26.2663-2(c) as proposed, if the property involved in a
generation-skipping transfer was not situated in the U.S. at the time
of the initial transfer, the generation-skipping transfer was still
subject to the GST tax if: (1) At the time of the direct skip, taxable
termination or distribution, the property passes to a skip person who
is a U.S. resident or citizen; and (2) at the time of the initial
transfer to the skip person or trust, a lineal descendant of the
transferor, who is a lineal ancestor of the skip person, was a resident
or citizen of the U.S. This rule applied regardless of the situs of the
property at the time of the actual distribution or termination. Section
26.2663-2(f) of the proposed regulations provided for the automatic
allocation of a NRA's $1,000,000 GST exemption regardless of whether
the transfer was a direct skip.
Thus, the proposed regulations subjected non-U.S. situs property to
the GST tax based on the status of the skip person/recipient of the
property at the time the property was received, and the status of the
generation that was skipped at the time of the initial transfer to the
trust or skip person.
Many comments were critical of this approach. In general, these
comments emphasized that the estate and gift tax provisions subject
transfers by NRAs to transfer tax based on the situs of the property,
not the status of the recipient. Therefore, the proposed regulations
conflict with section 2663, which provides that the regulations should
be consistent with the principles of chapters 11 and 12 of the Internal
Revenue Code (Code). Further, the commentators argued that treating a
NRA who transfers non-U.S. situs property as a transferor for GST tax
purposes would conflict with the definition of transferor under section
2652, since the transfer would not be subject to estate or gift tax.
Under section 2652, an individual is a transferor only to the extent
the transfer is subject to U.S. gift tax or estate tax.
The proposed regulations have been revised to address these
concerns. Thus, the rules in the proposed regulations applying chapter
13 to transfers of property that were not subject to estate or gift tax
have been eliminated. Under the final regulations, the application of
the GST tax will be limited to situations where an estate or gift tax
is imposed on the property. Thus, the GST tax will apply to inter vivos
and testamentary direct skip transfers by a NRA transferor to the
extent a gift tax is imposed on the transfer (in the case of an inter
vivos transfer) or the transferred property is
[[Page 66903]]
included in the transferor's gross estate (in the case of a
testamentary direct skip). In the case of taxable terminations and
taxable distributions, chapter 13 will apply to the extent a gift tax
was imposed on the initial transfer to the trust, or the property was
included in the transferor's gross estate. Accordingly, under the final
regulations (in the absence of a situation involving an ETIP), the
application of Chapter 13 is generally dependent on the situs of the
property at the time of the initial transfer. The regulations contain
special rules for determining the applicable fraction and inclusion
ratio where a trust is funded with both U.S. and foreign situs
property.
In general, the rules of Sec. 26.2632-1 apply with respect to the
allocation of the exemption. However, the ETIP rule provided in
Sec. 26.2632-1(c) applies only if the property transferred by the NRA
is subsequently included in the transferor's gross estate. The final
regulations provide transitional relief with respect to NRA's who made
GST transfers and relied on the automatic allocation rules in the
proposed regulations.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It has also been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to
these regulations, and therefore, a Regulatory Flexibility Analysis is
not required. Pursuant to section 7805(f) of the Internal Revenue Code,
the notice of proposed rulemaking preceding these regulations was
submitted to the Small Business Administration for comment on its
impact on small business.
Drafting Information. The principal author of these regulations is
James F. Hogan, Office of the Chief Counsel, IRS. Other personnel from
the IRS and Treasury Department participated in their development.
List of Subjects
26 CFR Part 26
Estate taxes, Reporting and recordkeeping requirements.
26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
26 CFR part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 26, 301, and 602 are amended as follows:
Paragraph 1. Part 26 is revised to read as follows:
PART 26--GENERATION-SKIPPING TRANSFER TAX REGULATIONS UNDER THE TAX
REFORM ACT OF 1986
Sec.
26.2600-1 Table of contents.
26.2601-1 Effective dates.
26.2611-1 Generation-skipping transfer defined.
26.2612-1 Definitions.
26.2613-1 Skip person.
26.2632-1 Allocation of GST exemption.
26.2641-1 Applicable rate of tax.
26.2642-1 Inclusion ratio.
26.2642-2 Valuation.
26.2642-3 Special rule for charitable lead annuity trusts.
26.2642-4 Redetermination of applicable fraction.
26.2642-5 Finality of inclusion ratio.
26.2652-1 Transferor defined; other definitions.
26.2652-2 Special election for qualified terminable interest
property.
26.2653-1 Taxation of multiple skips.
26.2654-1 Certain trusts treated as separate trusts.
26.2662-1 Generation-skipping transfer tax return requirements.
26.2663-1 Recapture tax under section 2032A.
26.2663-2 Application of chapter 13 to transfers by nonresidents
not citizens of the United States.
Authority: 26 U.S.C. 7805 and 26 U.S.C. 2663.
Section 26.2632-1 also issued under 26 U.S.C. 2632 and 2663.
Section 26.2642-4 also issued under 26 U.S.C. 2632 and 2663.
Section 26.2662-1 also issued under 26 U.S.C. 2662.
Section 26.2663-2 also issued under 26 U.S.C. 2632 and 2663.
Sec. 26.2600-1 Table of contents.
This section lists the captions that appear in the regulations
under sections 2601 through 2663.
Sec. 26.2601-1 Effective dates.
(a) Transfers subject to the generation-skipping transfer tax.
(1) In general.
(2) Certain transfers treated as if made after October 22, 1986.
(3) Certain trust events treated as if occurring after October
22, 1986.
(4) Example.
(b) Exceptions.
(1) Irrevocable trusts.
(2) Transition rule for wills or revocable trusts executed
before October 22, 1986.
(3) Transition rule in the case of mental incompetency.
(4) Exceptions to additions rule.
(c) Additional effective dates.
Sec. 26.2611-1 Generation-skipping transfer defined.
Sec. 26.2612-1 Definitions.
(a) Direct skip.
(1) In general.
(2) Special rule for certain lineal descendants.
(b) Taxable termination.
(1) In general.
(2) Partial termination.
(c) Taxable distribution.
(1) In general.
(2) Look-through rule not to apply.
(d) Skip person.
(e) Interest in trust.
(1) In general.
(2) Exceptions.
(3) Disclaimers.
(f) Examples.
Sec. 26.2613-1 Skip person.
Sec. 26.2632-1 Allocation of GST exemption.
(a) General rule.
(b) Lifetime allocations.
(1) Automatic allocation to direct skips.
(2) Allocation to other transfers.
(c) Special rules during an estate tax inclusion period.
(1) In general.
(2) Estate tax inclusion period defined.
(3) Termination of an ETIP.
(4) Treatment of direct skips.
(5) Examples.
(d) Allocations after the transferor's death.
(1) Allocation by executor.
(2) Automatic allocation after death.
Sec. 26.2641-1 Applicable rate of tax.
Sec. 26.2642-1 Inclusion ratio.
(a) In general.
(b) Numerator of applicable fraction.
(1) In general.
(2) GSTs occurring during an ETIP.
(c) Denominator of applicable fraction.
(1) In general.
(2) Zero denominator.
(3) Nontaxable gifts.
(d) Examples.
Sec. 26.2642-2 Valuation.
(a) Lifetime transfers.
(1) In general.
(2) Special rule for late allocations during life.
(b) Transfers at death.
(1) In general.
(2) Special rule for pecuniary payments.
(3) Special rule for residual transfers after payment of a
pecuniary payment.
(4) Appropriate interest.
(c) Examples.
Sec. 26.2642-3 Special rule for charitable lead annuity trusts.
(a) In general.
(b) Adjusted GST exemption defined.
(c) Example.
[[Page 66904]]
Sec. 26.2642-4 Redetermination of applicable fraction.
(a) In general.
(1) Multiple transfers to a single trust.
(2) Consolidation of separate trusts.
(3) Property included in transferor's gross estate.
(4) Imposition of recapture tax under section 2032A.
(b) Examples.
Sec. 26.2642-5 Finality of inclusion ratio.
(a) Direct skips.
(b) Other GSTs.
Sec. 26.2652-1 Transferor defined; other definitions.
(a) Transferor defined.
(1) In general.
(2) Transfers subject to Federal estate or gift tax.
(3) Special rule for certain QTIP trusts.
(4) Exercise of certain nongeneral powers of appointment.
(5) Split-gift transfers.
(6) Examples.
(b) Trust defined.
(1) In general.
(2) Examples.
(c) Trustee defined.
(d) Executor defined.
(e) Interest in trust.
Sec. 26.2652-2 Special election for qualified terminable interest
property.
(a) In general.
(b) Time and manner of making election.
(c) Transitional rule.
(d) Examples.
Sec. 26.2653-1 Taxation of multiple skips.
(a) General rule.
(b) Examples.
Sec. 26.2654-1 Certain trusts treated as separate trusts.
(a) Single trust treated as separate trusts.
(1) Substantially separate and independent shares.
(2) Multiple transferors with respect to a single trust.
(3) Severance of a single trust.
(4) Allocation of exemption.
(5) Examples.
(b) Division of a trust included in the gross estate.
(1) In general.
(2) Special rule.
(3) Allocation of exemption.
(4) Example.
Sec. 26.2662-1 Generation-skipping transfer tax return
requirements.
(a) In general.
(b) Form of return.
(1) Taxable distributions.
(2) Taxable terminations.
(3) Direct skip.
(c) Person liable for tax and required to make return.
(1) In general.
(2) Special rule for direct skips occurring at death with
respect to property held in trust arrangements.
(3) Limitation on personal liability of trustee.
(4) Exceptions.
(d) Time and manner of filing return.
(1) In general.
(2) Exceptions for alternative valuation of taxable termination.
(e) Place for filing returns.
(f) Lien on property.
Sec. 26.2663-1 Recapture tax under section 2032A.
Sec. 26.2663-2 Application of chapter 13 to transfers by
nonresidents not citizens of the United States.
(a) In general.
(b) Transfers subject to Chapter 13.
(1) Direct skips.
(2) Taxable distributions and taxable terminations.
(c) Trusts funded in part with property subject to Chapter 13
and in part with property not subject to Chapter 13.
(1) In general.
(2) Nontax portion of the trust.
(3) Special rule with respect to estate tax inclusion period.
(d) Examples.
(e) Transitional rule for allocations for transfers made before
December 27, 1995.
26.2601-1 Effective dates.
(a) Transfers subject to the generation-skipping transfer tax--(1)
In general. Except as otherwise provided in this section, the
provisions of chapter 13 of the Internal Revenue Code of 1986 (Code)
apply to any generation-skipping transfer (as defined in section 2611)
made after October 22, 1986.
(2) Certain transfers treated as if made after October 22, 1986.
Solely for purposes of chapter 13, an inter vivos transfer is treated
as if it were made on October 23, 1986, if it was--
(i) Subject to chapter 12 (regardless of whether a tax was actually
incurred or paid); and
(ii) Made after September 25, 1985, but before October 23, 1986.
For purposes of this paragraph, the value of the property transferred
shall be the value of the property on the date the property was
transferred.
(3) Certain trust events treated as if occurring after October 22,
1986. For purposes of chapter 13, if an inter vivos transfer is made to
a trust after September 25, 1985, but before October 23, 1986, any
subsequent distribution from the trust or termination of an interest in
the trust that occurred before October 23, 1986, is treated as
occurring immediately after the deemed transfer on October 23, 1986. If
more than one distribution or termination occurs with respect to a
trust, the events are treated as if they occurred on October 23, 1986,
in the same order as they occurred. See paragraph (b)(1)(iv)(B) of this
section for rules determining the portion of distributions and
terminations subject to tax under chapter 13. This paragraph (a)(3)
does not apply to transfers to trusts not subject to chapter 13 by
reason of the transition rules in paragraphs (b) (2) and (3) of this
section. The provisions of this paragraph (a)(3) do not apply in
determining the value of the property under chapter 13.
(4) Example. The following example illustrates the principle that
paragraph (a)(2) of this section is not applicable to transfers under a
revocable trust that became irrevocable by reason of the transferor's
death after September 25, 1985, but before October 23, 1986:
Example. T created a revocable trust on September 30, 1985, that
became irrevocable when T died on October 10, 1986. Although the
trust terminated in favor of a grandchild of T, the transfer to the
grandchild is not treated as occurring on October 23, 1986, pursuant
to paragraph (a)(2) of this section because it is not an inter vivos
transfer subject to chapter 12. The transfer is not subject to
chapter 13 because it is in the nature of a testamentary transfer
that occurred prior to October 23, 1986.
(b) Exceptions--(1) Irrevocable trusts--(i) In general. The
provisions of chapter 13 do not apply to any generation-skipping
transfer under a trust (as defined in section 2652(b)) that was
irrevocable on September 25, 1985. The rule of the preceding sentence
does not apply to a pro rata portion of any generation-skipping
transfer under an irrevocable trust if additions are made to the trust
after September 25, 1985. See paragraph (b)(1)(iv) of this section for
rules for determining the portion of the trust that is subject to the
provisions of chapter 13.
(ii) Irrevocable trust defined--(A) In general. Unless otherwise
provided in either paragraph (b)(1)(ii) (B) or (C) of this section, any
trust (as defined in section 2652(b)) in existence on September 25,
1985, is considered an irrevocable trust.
(B) Property includible in the gross estate under section 2038. For
purposes of this chapter a trust is not an irrevocable trust to the
extent that, on September 25, 1985, the settlor held a power with
respect to such trust that would have caused the value of the trust to
be included in the settlor's gross estate for Federal estate tax
purposes by reason of section 2038 (without regard to powers
relinquished before September 25, 1985) if the settlor had died on
September 25, 1985. A trust is considered subject to a power on
September 25, 1985, even though the exercise of the power was subject
to the precedent giving of notice, or even though the exercise could
take effect only on the expiration of a stated period, whether or not
on or before September 25, 1985, notice had been given or the power had
been exercised.
[[Page 66905]]
A trust is not considered subject to a power if the power is, by its
terms, exercisable only on the occurrence of an event or contingency
not subject to the settlor's control (other than the death of the
settlor) and if the event or contingency had not in fact taken place on
September 25, 1985.
(C) Property includible in the gross estate under section 2042. A
policy of insurance on an individual's life that is treated as a trust
under section 2652(b) is not considered an irrevocable trust to the
extent that, on September 25, 1985, the insured possessed any incident
of ownership (as defined in Sec. 20.2042-1(c) of this chapter, and
without regard to any incidents of ownership relinquished before
September 25, 1985), that would have caused the value of the trust,
(i.e., the insurance proceeds) to be included in the insured's gross
estate for Federal estate tax purposes by reason of section 2042, if
the insured had died on September 25, 1985.
(D) Examples. The following examples illustrate the application of
this paragraph (b)(1):
Example 1. Section 2038 applicable. On September 25, 1985, T,
the settlor of a trust that was created before September 25, 1985,
held a testamentary power to add new beneficiaries to the trust. T
held no other powers over any portion of the trust. The testamentary
power held by T would have caused the trust to be included in T's
gross estate under section 2038 if T had died on September 25, 1985.
Therefore, the trust is not an irrevocable trust for purposes of
this section.
Example 2. Section 2038 not applicable when power held by a
person other than settlor. On September 25, 1985, S, the spouse of
the settlor of a trust in existence on that date, had an annual
right to withdraw a portion of the principal of the trust. The trust
was otherwise irrevocable on that date. Because the power was not
held by the settlor of the trust, it is not a power described in
section 2038. Thus, the trust is considered an irrevocable trust for
purposes of this section.
Example 3. Section 2038 not applicable. In 1984, T created a
trust and retained the right to expand the class of remaindermen to
include any of T's afterborn grandchildren. As of September 25,
1985, all of T's grandchildren were named remaindermen of the trust.
Since the exercise of T's power was dependent on there being
afterborn grandchildren who were not members of the class of
remaindermen, a contingency that did not exist on September 25,
1985, the trust is not considered subject to the power on September
25, 1985, and is an irrevocable trust for purposes of this section.
The result is not changed even if grandchildren are born after
September 25, 1985, whether or not T exercises the power to expand
the class of remaindermen.
Example 4. Section 2042 applicable. On September 25, 1985, T
purchased an insurance policy on T's own life and designated child,
C, and grandchild, GC, as the beneficiaries. T retained the power to
obtain from the insurer a loan against the surrender value of the
policy. T's insurance policy is a trust (as defined in section
2652(b)) for chapter 13 purposes. The trust is not considered an
irrevocable trust because, on September 25, 1985, T possessed an
incident of ownership that would have caused the value of the policy
to be included in T's gross estate under section 2042 if T had died
on that date.
Example 5. Trust partially irrevocable. In 1984, T created a
trust naming T's grandchildren as the income and remainder
beneficiaries. T retained the power to revoke the trust as to one-
half of the principal at any time prior to T's death. T retained no
other powers over the trust principal. T did not die before
September 25, 1985, and did not exercise or release the power before
that date. The half of the trust not subject to T's power to revoke
is an irrevocable trust for purposes of this section.
(iii) Trust containing qualified terminable interest property--(A)
In general. For purposes of chapter 13, a trust described in paragraph
(b)(1)(ii) of this section that holds qualified terminable interest
property by reason of an election under section 2056(b)(7) or section
2523(f) (made either on, before or after September 25, 1985) is treated
in the same manner as if the decedent spouse or the donor spouse (as
the case may be) had made an election under section 2652(a)(3). Thus,
transfers from such trusts are not subject to chapter 13, and the
decedent spouse or the donor spouse (as the case may be) is treated as
the transferor of such property. The rule of this paragraph (b)(1)(iii)
does not apply to that portion of the trust that is subject to chapter
13 by reason of an addition to the trust occurring after September 25,
1985. See Sec. 26.2652-2(a) for rules where an election under section
2652(a)(3) is made. See Sec. 26.2652-2(c) for rules where a portion of
a trust is subject to an election under section 2652(a)(3).
(B) Examples. The following examples illustrate the application of
this paragraph (b)(1)(iii):
Example 1. QTIP election made after September 25, 1985. On March
28, 1985, T established a trust. The trust instrument provided that
the trustee must distribute all income annually to T's spouse, S,
during S's life. Upon S's death, the remainder is to be distributed
to GC, the grandchild of T and S. On April 15, 1986, T elected under
section 2523(f) to treat the property in the trust as qualified
terminable interest property. On December 1, 1987, S died and soon
thereafter the trust assets were distributed to GC. Because the
trust was irrevocable on September 25, 1985, the transfer to GC is
not subject to tax under chapter 13. T is treated as the transferor
with respect to the transfer of the trust assets to GC in the same
manner as if T had made an election under section 2652(a)(3) to
reverse the effect of the section 2523(f) election for chapter 13
purposes.
Example 2. Section 2652(a)(3) election deemed to have been made.
Assume the same facts as in Example 1, except the trust instrument
provides that after S's death all income is to be paid annually to
C, the child of T and S. Upon C's death, the remainder is to be
distributed to GC. C died on October 1, 1992, and soon thereafter
the trust assets are distributed to GC. Because the trust was
irrevocable on September 25, 1985, the termination of C's interest
is not subject to chapter 13.
(iv) Additions to irrevocable trusts--(A) In general. If an
addition is made after September 25, 1985, to an irrevocable trust
which is excluded from chapter 13 by reason of paragraph (b)(1) of this
section, a pro rata portion of subsequent distributions from (and
terminations of interests in property held in) the trust is subject to
the provisions of chapter 13. If an addition is made, the trust is
thereafter deemed to consist of two portions, a portion not subject to
chapter 13 (the non-chapter 13 portion) and a portion subject to
chapter 13 (the chapter 13 portion), each with a separate inclusion
ratio (as defined in section 2642(a)). The non-chapter 13 portion
represents the value of the assets of the trust as it existed on
September 25, 1985. The applicable fraction (as defined in section
2642(a)(2)) for the non-chapter 13 portion is deemed to be 1 and the
inclusion ratio for such portion is 0. The chapter 13 portion of the
trust represents the value of all additions made to the trust after
September 25, 1985. The inclusion ratio for the chapter 13 portion is
determined under section 2642. This paragraph (b)(1)(iv)(A) requires
separate portions of one trust only for purposes of determining
inclusion ratios. For purposes of chapter 13, a constructive addition
under paragraph (b)(1)(v) of this section is treated as an addition.
See paragraph (b)(4) of this section for exceptions to the additions
rule of this paragraph (b)(1)(iv). See Sec. 26.2654-1(a)(2) for rules
treating additions to a trust by an individual other than the initial
transferor as a separate trust for purposes of chapter 13.
(B) Terminations of interests in and distributions from trusts.
Where a termination or distribution described in section 2612 occurs
with respect to a trust to which an addition has been made, the portion
of such termination or distribution allocable to the chapter 13 portion
is determined by reference to the allocation fraction, as defined in
paragraph (b)(1)(iv)(C) of this section. In the case of a termination
described in section 2612(a) with respect to a trust, the portion of
such termination that is
[[Page 66906]]
subject to chapter 13 is the product of the allocation fraction and the
value of the trust (to the extent of the terminated interest therein).
In the case of a distribution described in section 2612(b) from a
trust, the portion of such distribution that is subject to chapter 13
is the product of the allocation fraction and the value of the property
distributed.
(C) Allocation fraction--(1) In general. The allocation fraction
allocates appreciation and accumulated income between the chapter 13
and non-chapter 13 portions of a trust. The numerator of the allocation
fraction is the amount of the addition (valued as of the date the
addition is made), determined without regard to whether any part of the
transfer is subject to tax under chapter 11 or chapter 12, but reduced
by the amount of any Federal or state estate or gift tax imposed and
subsequently paid by the recipient trust with respect to the addition.
The denominator of the allocation fraction is the total value of the
entire trust immediately after the addition. For purposes of this
paragraph (b)(1)(iv)(C), the total value of the entire trust is the
fair market value of the property held in trust (determined under the
rules of section 2031), reduced by any amount attributable to or paid
by the trust and attributable to the transfer to the trust that is
similar to an amount that would be allowable as a deduction under
section 2053 if the addition had occurred at the death of the
transferor, and further reduced by the same amount that the numerator
was reduced to reflect Federal or state estate or gift tax incurred by
and subsequently paid by the recipient trust with respect to the
addition. Where there is more than one addition to principal after
September 25, 1985, the portion of the trust subject to chapter 13
after each such addition is determined pursuant to a revised fraction.
In each case, the numerator of the revised fraction is the sum of the
value of the chapter 13 portion of the trust immediately before the
latest addition, and the amount of the latest addition. The denominator
of the revised fraction is the total value of the entire trust
immediately after the addition. If the transfer to the trust is a
generation-skipping transfer, the numerator and denominator are reduced
by the amount of the generation-skipping transfer tax, if any, that is
imposed by chapter 13 on the transfer and actually recovered from the
trust. The allocation fraction is rounded off to five decimal places
(.00001).
(2) Examples. The following examples illustrate the application of
paragraph (b)(1)(iv) of this section. In each of the examples, assume
that the recipient trust does not pay any Federal or state transfer tax
by reason of the addition.
Example 1. Post September 25, 1985, addition to trust. (i) On
August 16, 1980, T established an irrevocable trust. Under the trust
instrument, the trustee is required to distribute the entire income
annually to T's child, C, for life, then to T's grandchild, GC, for
life. Upon GC's death, the remainder is to be paid to GC's issue. On
October 1, 1986, when the total value of the entire trust is
$400,000, T transfers $100,000 to the trust. The allocation fraction
is computed as follows:
[GRAPHIC][TIFF OMITTED]TR27DE95.002
(ii) Thus, immediately after the transfer, 20 percent of the
value of future generation-skipping transfers under the trust will
be subject to chapter 13.
Example 2. Effect of expenses. Assume the same facts as in
Example 1, except immediately prior to the transfer on October 1,
1986, the fair market value of the individual assets in the trust
totaled $400,000. Also, assume that the trust had accrued and unpaid
debts, expenses, and taxes totaling $300,000. Assume further that
the entire $300,000 represented amounts that would be deductible
under section 2053 if the trust were includible in the transferor's
gross estate. The numerator of the allocation fraction is $100,000
and the denominator of the allocation fraction is $200,000
(($400,000-$300,000)+$100,000). Thus, the allocation fraction is .5
($100,000/$200,000) and 50 percent of the value of future
generation-skipping transfers will be subject to chapter 13.
Example 3. Multiple additions. (i) Assume the same facts as in
Example 1, except on January 30, 1988, when the total value of the
entire trust is $600,000, T transfers an additional $40,000 to the
trust. Before the transfer, the value of the portion of the trust
that was attributable to the prior addition was $120,000
($600,000 x .2). The new allocation fraction is computed as follows:
[GRAPHIC][TIFF OMITTED]TR27DE95.003
(ii) Thus, immediately after the transfer, 25 percent of the
value of future generation-skipping transfers under the trust will
be subject to chapter 13.
Example 4. Allocation fraction at time of generation-skipping
transfer. Assume the same facts as in Example 3, except on March 1,
1989, when the value of the trust is $800,000, C dies. A generation-
skipping transfer occurs at C's death because of the termination of
C's life estate. Therefore, $200,000 ($800,000 x .25) is subject to
tax under chapter 13.
(v) Constructive additions--(A) Powers of Appointment. Except as
provided in paragraph (b)(1)(v)(B) of this section, where any portion
of a trust remains in the trust after the post-September 25, 1985,
release, exercise, or lapse of a power of appointment over that portion
of the trust, and the release, exercise, or lapse is treated to any
extent as a taxable transfer under chapter 11 or chapter 12, the value
of the entire portion of the trust subject to the power that was
released, exercised, or lapsed is treated as if that portion had been
withdrawn and immediately retransferred to the trust at the time of the
release, exercise, or lapse. The creator of the power will be
considered the transferor of the addition except to the extent that the
release, exercise, or lapse of the power is treated as a taxable
transfer under chapter 11 or chapter 12. See Sec. 26.2652-1 for rules
for determining the identity of the transferor of property for purposes
of chapter 13.
(B) Special rule for certain powers of appointment. The release,
exercise, or lapse of a power of appointment (other than a general
power of appointment as defined in section 2041(b)) is not treated as
an addition to a trust if--
(1) Such power of appointment was created in an irrevocable trust
that is not subject to chapter 13 under paragraph (b)(1) of this
section; and
(2) In the case of an exercise, the power of appointment is not
exercised in a manner that may postpone or
[[Page 66907]]
suspend the vesting, absolute ownership or power of alienation of an
interest in property for a period, measured from the date of creation
of the trust, extending beyond any life in being at the date of
creation of the trust plus a period of 21 years plus, if necessary, a
reasonable period of gestation (the perpetuities period). For purposes
of this paragraph (b)(1)(v)(B)(2), the exercise of a power of
appointment that validly postpones or suspends the vesting, absolute
ownership or power of alienation of an interest in property for a term
of years that will not exceed 90 years (measured from the date of
creation of the trust) will not be considered an exercise that
postpones or suspends vesting, absolute ownership or the power of
alienation beyond the perpetuities period. If a power is exercised by
creating another power, it is deemed to be exercised to whatever extent
the second power may be exercised.
(C) Constructive addition if liability is not paid out of trust
principal. Where a trust described in paragraph (b)(1) of this section
is relieved of any liability properly payable out of the assets of such
trust, the person or entity who actually satisfies the liability is
considered to have made a constructive addition to the trust in an
amount equal to the liability. The constructive addition occurs when
the trust is relieved of liability (e.g., when the right of recovery is
no longer enforceable). But see Sec. 26.2652-1(a)(3) for rules
involving the application of section 2207A in the case of an election
under section 2652(a)(3).
(D) Examples. The following examples illustrate the application of
this paragraph (b)(1)(v):
Example 1. Lapse of a power of appointment. On June 19, 1980, T
established an irrevocable trust with a corpus of $500,000. The
trust instrument provides that the trustee shall distribute the
entire income from the trust annually to T's spouse, S, during S's
life. At S's death, the remainder is to be distributed to T and S's
grandchild, GC. T also gave S a general power of appointment over
one-half of the trust assets. On December 21, 1989, when the value
of the trust corpus is $1,500,000, S died without having exercised
the general power of appointment. The value of one-half of the trust
corpus, $750,000 ($1,500,000 x .5) is included in S's gross estate
under section 2041(a) and is subject to tax under Chapter 11.
Because the value of one-half of the trust corpus is subject to tax
under Chapter 11 with respect to S's estate, S is treated as the
transferor of that property for purposes of Chapter 13 (see section
2652(a)(1)(A)). For purposes of the generation-skipping transfer
tax, the lapse of S's power of appointment is treated as if $750,000
($1,500,000 x .5) had been distributed to S and then transferred
back to the trust. Thus, S is considered to have added $750,000
($1,500,000 x .5) to the trust at the date of S's death. Because
this constructive addition occurred after September 25, 1985, 50
percent of the corpus of the trust became subject to Chapter 13 at
S's death.
Example 2. Multiple actual additions. On June 19, 1980, T
established an irrevocable trust with a principal of $500,000. The
trust instrument provides that the trustee shall distribute the
entire income from the trust annually to T's spouse, S, during S's
life. At S's death, the remainder is to be distributed to GC, the
grandchild of T and S. On October 1, 1985, when the trust assets
were valued at $800,000, T added $200,000 to the trust. After the
transfer on October 1, 1985, the allocation fraction was .2
($200,000/$1,000,000). On December 21, 1989, when the value of the
trust principal is $1,000,000, T adds $1,000,000 to the trust. After
this addition, the new allocation fraction is 0.6 ($1,200,000/
$2,000,000). The numerator of the fraction is the value of that
portion of trust assets that were subject to chapter 13 immediately
prior to the addition (by reason of the first addition), $200,000
(.2 $1,000,000), plus the value of the second transfer,
$1,000,000, which equals $1,200,000. The denominator of the
fraction, $2,000,000, is the total value of the trust assets
immediately after the second transfer. Thus, 60 percent of the
principal of the trust becomes subject to chapter 13.
Example 3. Entire portion of trust subject to lapsed power is
treated as an addition. On September 25, 1985, B possessed a general
power of appointment over the assets of an irrevocable trust that
had been created by T in 1980. Under the terms of the trust, B's
power lapsed on July 20, 1987. For Federal gift tax purposes, B is
treated as making a gift of ninety-five percent (100%--5%) of the
value of the principal (see section 2514). However, because the
entire trust was subject to the power of appointment, 100 percent
(that portion of the trust subject to the power) of the assets of
the trust are treated as a constructive addition. Thus, the entire
amount of all generation-skipping transfers occurring pursuant to
the trust instrument after July 20, 1987, are subject to chapter 13.
Example 4. Exercise of power of appointment in favor of another
trust. On March 1, 1985, T established an irrevocable trust as
defined in paragraph (b)(1)(ii) of this section. Under the terms of
the trust instrument, the trustee is required to distribute the
entire income annually to T's child, C, for life, then to T's
grandchild, GC, for life. GC has the power to appoint any or all of
the trust assets to Trust 2 which is an irrevocable trust (as
defined in paragraph (b)(1)(ii) of this section) that was
established on August 1, 1985. The terms of Trust 2's governing
instrument provide that the trustee shall pay income to T's great
grandchild, GGC, for life. Upon GGC's death the remainder is to be
paid to GGC's issue. GGC was alive on March 1, 1985, when Trust 1
was created. C died on April 1, 1986. On July 1, 1987, GC exercised
the power of appointment. The exercise of GC's power does not
subject future transfers from Trust 2 to tax under chapter 13
because the exercise of the power in favor of Trust 2 does not
suspend the vesting, absolute ownership, or power of alienation of
an interest in property for a period, measured from the date of
creation of Trust 1, extending beyond the life of GGC (a beneficiary
under Trust 2 who was in being at the date of creation of Trust 1)
plus a period of 21 years. The result would be the same if Trust 2
had been created after the effective date of chapter 13.
Example 5. Exercise of power of appointment in favor of another
trust. Assume the same facts as in Example 3, except that GGC was
born on March 28, 1986. The valid exercise of GC's power in favor of
Trust 2 causes the principal of Trust 1 to be subject to chapter 13,
because GGC was not born until after the creation of Trust 1. Thus,
such exercise may suspend the vesting, absolute ownership, or power
of alienation of an interest in the trust principal for a period,
measured from the date of creation of Trust 1, extending beyond the
life of GGC (a beneficiary under Trust 2 who was not a life in being
at the date of creation of Trust 1).
Example 6. Extension for the longer of two periods. Prior to the
effective date of chapter 13, GP established an irrevocable trust
under which the trust income was to be paid to GP's child, C, for
life. C was given a testamentary power to appoint the remainder in
further trust for the benefit of C's issue. In default of C's
exercise of the power, the remainder was to pass to charity. C died
on February 3, 1995, survived by a child who was alive when GP
established the trust. C exercised the power in a manner that
validly extends the trust in favor of C's issue until the latter of
May 15, 2064 (80 years from the date the trust was created), or the
death of C's child plus 21 years. C's exercise of the power is a
constructive addition to the trust because the exercise may extend
the trust for a period longer than the permissible periods of either
the life of C's child (a life in being at the creation of the trust)
plus 21 years or a term not more than 90 years measured from the
creation of the trust. On the other hand, if C's exercise of the
power could extend the trust based only on the life of C's child
plus 21 years or only for a term of 80 years from the creation of
the trust (but not the later of the two periods) then the exercise
of the power would not have been a constructive addition to the
trust.
Example 7. Extension for the longer of two periods. The facts
are the same as in Example 6 except local law provides that the
effect of C's exercise is to extend the term of the trust until May
15, 2064, whether or not C's child predeceases that date by more
than 21 years. C's exercise is not a constructive addition to the
trust because C exercised the power in a manner that cannot postpone
or suspend vesting, absolute ownership, or power of alienation for a
term of years that will exceed 90 years. The result would be the
same if the effect of C's exercise is either to extend the term of
the trust until 21 years after the death of C's child or to extend
the term of the trust until the first to occur of May 15, 2064 or 21
years after the death of C's child.
(vi) Appreciation and income. Except to the extent that the
provisions of paragraphs (b)(1)(iv) and (v) of this
[[Page 66908]]
section allocate subsequent appreciation and accumulated income between
the original trust and additions thereto, appreciation in the value of
the trust and undistributed income added thereto are not considered an
addition to the principal of a trust.
(2) Transition rule for wills or revocable trusts executed before
October 22, 1986--(i) In general. The provisions of chapter 13 do not
apply to any generation-skipping transfer under a will or revocable
trust executed before October 22, 1986, provided that--
(A) The document in existence on October 21, 1986, is not amended
at any time after October 21, 1986, in any respect which results in the
creation of, or an increase in the amount of, a generation-skipping
transfer;
(B) In the case of a revocable trust, no addition is made to the
revocable trust after October 21, 1986, that results in the creation
of, or an increase in the amount of, a generation-skipping transfer;
and
(C) The decedent dies before January 1, 1987.
(ii) Revocable trust defined. For purposes of this section, the
term revocable trust means any trust (as defined in section 2652(b))
except to the extent that, on October 22, 1986, the trust--
(A) Was an irrevocable trust described in paragraph (b)(1) of this
section; or
(B) Would have been an irrevocable trust described in paragraph
(b)(1) of this section had it not been created or become irrevocable
after September 25, 1985, and before October 22, 1986.
(iii) Will or revocable trust containing qualified terminable
interest property. The rules contained in paragraph (b)(1)(iii) of this
section apply to any will or revocable trust within the scope of the
transition rule of this paragraph (b)(2).
(iv) Amendments to will or revocable trust. For purposes of this
paragraph (b)(2), an amendment to a will or a revocable trust in
existence on October 21, 1986, is not considered to result in the
creation of, or an increase in the amount of, a generation-skipping
transfer where the amendment is--
(A) Basically administrative or clarifying in nature and only
incidentally increases the amount transferred; or
(B) Designed to ensure that an existing bequest or transfer
qualifies for the applicable marital or charitable deduction for
estate, gift, or generation-skipping transfer tax purposes and only
incidentally increases the amount transferred to a skip person or to a
generation-skipping trust.
(v) Creation of, or increase in the amount of, a GST. In
determining whether a particular amendment to a will or revocable trust
creates, or increases the amount of, a generation-skipping transfer for
purposes of this paragraph (b)(2), the effect of the instrument(s) in
existence on October 21, 1986, is measured against the effect of the
instrument(s) in existence on the date of death of the decedent or on
the date of any prior generation-skipping transfer. If the effect of an
amendment cannot be immediately determined, it is deemed to create, or
increase the amount of, a generation-skipping transfer until a
determination can be made.
(vi) Additions to revocable trusts. Any addition made after October
21, 1986, but before the death of the settlor, to a revocable trust
subjects all subsequent generation-skipping transfers under the trust
to the provisions of chapter 13. Any addition made to a revocable trust
after the death of the settlor (if the settlor dies before January 1,
1987) is treated as an addition to an irrevocable trust. See paragraph
(b)(1)(v) of this section for rules involving constructive additions to
trusts. See paragraph (b)(1)(v)(B) of this section for rules providing
that certain transfers to trusts are not treated as additions for
purposes of this section.
(vii) Examples. The following examples illustrate the application
of paragraph (b)(2)(iv) of this section:
(A) Facts applicable to Examples 1 through 5. In each of Examples 1
through 5 assume that T executed a will prior to October 22, 1986, and
that T dies on December 31, 1986.
Example 1. Administrative change. On November 1, 1986, T
executes a codicil to T's will removing one of the co-executors
named in the will. Although the codicil may have the effect of
lowering administrative costs and thus increasing the amount
transferred, it is considered administrative in nature and thus does
not cause generation-skipping transfers under the will to be subject
to chapter 13.
Example 2. Effect of amendment not immediately determinable. On
November 1, 1986, T executes a codicil to T's will revoking a
bequest of $100,000 to C, a non-skip person (as defined under
section 2613(b)) and causing that amount to be added to a residuary
trust held for a skip person. The amendment is deemed to increase
the amount of a generation-skipping transfer and prevents any
transfers under the will from qualifying under paragraph (b)(2)(i)
of this section. If, however, C dies before T and under local law
the property would have been added to the residue in any event
because the bequest would have lapsed, the codicil is not considered
an amendment that increases the amount of a generation-skipping
transfer.
Example 3. Refund of tax paid because of amendment. T's will
provided that an amount equal to the maximum allowable marital
deduction would pass to T's spouse with the residue of the estate
passing to a trust established for the benefit of skip persons. On
October 23, 1986, the will is amended to provide that the marital
share passing to T's spouse shall be the lesser of the maximum
allowable marital deduction or the minimum amount that will result
in no estate tax liability for T's estate. The amendment may
increase the amount of a generation-skipping transfer. Therefore,
any generation-skipping transfers under the will are subject to tax
under chapter 13. If it becomes apparent that the amendment does not
increase the amount of a generation-skipping transfer, a claim for
refund may be filed with respect to any generation-skipping transfer
tax that was paid within the period set forth in section 6511. For
example, it would become apparent that the amendment did not result
in an increase in the residue if it is subsequently determined that
the maximum marital deduction and the minimum amount that will
result in no estate tax liability are equal in amount.
Example 4. An amendment that increases a generation-skipping
transfer causes complete loss of exempt status. T's will provided
for the creation of two trusts for the benefit of skip persons. On
November 1, 1986, T executed a codicil to the will specifically
increasing the amount of a generation-skipping transfer under the
will. All transfers made pursuant to the will or either of the
trusts created thereunder are precluded from qualifying under the
transition rule of paragraph (b)(2)(i) of this section and are
subject to tax under chapter 13.
Example 5. Corrective action effective. Assume that T in Example
4 later executes a second codicil deleting the increase to the
generation-skipping transfer. Because the provision increasing a
generation-skipping transfer does not become effective, it is not
considered an amendment to a will in existence on October 22, 1986.
(B) Facts applicable to Examples 6 through 9. T created a trust on
September 30, 1985, in which T retained the power to revoke the
transfer at any time prior to T's death. The trust provided that, upon
the death of T, the income was to be paid to T's spouse, W, for life
and then to A, B, and C, the children of T's sibling, S, in equal
shares for life, with one-third of the principal to be distributed per
stirpes to each child's surviving issue upon the death of the child.
The trustee has the power to make discretionary distributions of trust
principal to T's sibling, S.
Example 6. Amendment that affects only a person who is not a
skip person. A became disabled, and T modified the trust on December
1, 1986, to increase A's share of the income. Since the amendment
does not result in the creation of, or increase in the amount of, a
generation-skipping transfer,
[[Page 66909]]
transfers pursuant to the trust are not subject to chapter 13.
Example 7. Amendment increasing skip person's share. Assume that
A, B, and C are the grandchildren of S rather than the children (and
thus are skip persons as defined in section 2613). T's amendment of
the trust increasing A's share of the income subjects the trust to
the provisions of chapter 13 because the amendment increases the
amount of the generation-skipping transfers to be made to A.
Example 8. Amendment that adds a skip person. Assume that T
amends the trust to add T's grandchild, D, as an income beneficiary.
The trust will be subject to the provisions of chapter 13 because
the amendment creates a generation-skipping transfer.
Example 9. Refund of tax paid during interim period when effect
of amendment is not determinable. Assume that T amends the trust to
provide that the issue of S are to take a one-fourth share of the
principal per stirpes upon S's death. Because the distribution to be
made upon S's death may involve skip persons, the amendment is
considered an amendment that creates or increases the amount of a
generation-skipping transfer until a determination can be made.
Accordingly, any distributions from (or terminations of interests
in) such trust are subject to chapter 13 until it is determined that
no skip person has been added to the trust. At that time, a claim
for refund may be filed within the period set forth in section 6511
with respect to any generation-skipping transfer tax that was paid.
(3) Transition rule in the case of mental incompetency--(i) In
general. If an individual was under a mental disability to change the
disposition of his or her property continuously from October 22, 1986,
until the date of his or her death, the provisions of chapter 13 do not
apply to any generation-skipping transfer-(A) Under a trust (as defined
in section 2652(b)) to the extent such trust consists of property, or
the proceeds of property, the value of which was included in the gross
estate of the individual (other than property transferred by or on
behalf of the individual during the individual's life after October 22,
1986); or
(B) Which is a direct skip (other than a direct skip from a trust)
that occurs by reason of the death of the individual.
(ii) Mental disability defined. For purposes of this paragraph
(b)(2), the term mental disability means mental incompetence to execute
an instrument governing the disposition of the individual's property,
whether or not there was an adjudication of incompetence and regardless
of whether there has been an appointment of a guardian, fiduciary, or
other person charged with either the care of the individual or the care
of the individual's property.
(iii) Decedent who has not been adjudged mentally incompetent. If
there has not been a court adjudication that the decedent was mentally
incompetent on or before October 22, 1986, the executor must file, with
Form 706, either--
(A) A certification from a qualified physician stating that the
decedent was--
(1) mentally incompetent at all times on and after October 22,
1986; and
(2) did not regain competence to modify or revoke the terms of the
trust or will prior to his or her death; or
(B) Sufficient other evidence demonstrating that the decedent was
mentally incompetent at all times on and after October 22, 1986, as
well as a statement explaining why no certification is available from a
physician; and
(C) Any judgment or decree relating to the decedent's incompetency
that was made after October 22, 1986. Such items will be considered
relevant, but not determinative, in establishing the decedent's state
of competency.
(iv) Decedent who has been adjudged mentally incompetent. If the
decedent has been adjudged mentally incompetent on or before October
22, 1986, a copy of the judgment or decree, and any modification
thereof, must be filed with the Form 706.
(v) Rule applies even if another person has power to change trust
terms. In the case of a transfer from a trust, this paragraph (b)(3)
applies even though a person charged with the care of the decedent or
the decedent's property has the power to revoke or modify the terms of
the trust, provided that the power is not exercised after October 22,
1986, in a manner that creates, or increases the amount of, a
generation-skipping transfer. See paragraph (b)(2)(iv) of this section
for rules concerning amendments that create or increase the amount of a
generation-skipping transfer.
(vi) Example. The following example illustrates the application of
paragraph (b)(3)(v) of this section:
Example. T was mentally incompetent on October 22, 1986, and
remained so until death in 1993. Prior to becoming incompetent, T
created a revocable generation-skipping trust that was includible in
T's gross estate. Prior to October 22, 1986, the appropriate court
issued an order under which P, who was thereby charged with the care
of T's property, had the power to modify or revoke the revocable
trust. Although P exercised the power after October 22, 1986, and
while T was incompetent, the power was not exercised in a manner
that created, or increased the amount of, a generation-skipping
transfer. Thus, the existence and exercise of P's power did not
cause the trust to lose its exempt status under paragraph (b)(3) of
this section. The result would be the same if the court order was
issued after October 22, 1986.
(4) Exceptions to additions rule--(i) In general. Any addition to a
trust made pursuant to an instrument or arrangement covered by the
transition rules in paragraph (b) (2) or (3) of this section is not
treated as an addition for purposes of this section. Moreover, any
property transferred inter vivos to a trust is not treated as an
addition if the same property would have been added to the trust
pursuant to an instrument covered by the transition rules in paragraph
(b) (2) or (3) of this section.
(ii) Examples. The following examples illustrate the application of
paragraph (b)(4)(i) of this section:
Example 1. Addition pursuant to terms of exempt instrument. On
December 31, 1980, T created an irrevocable trust having a principal
of $100,000. Under the terms of the trust, the principal was to be
held for the benefit of T's grandchild, GC. Pursuant to the terms of
T's will, a document entitled to relief under the transition rule of
paragraph (b)(2) of this section, the residue of the estate was paid
to the trust. Because the addition to the trust was paid pursuant to
the terms of an instrument (T's will) that is not subject to the
provisions of chapter 13 because of paragraph (b)(2) of this
section, the payment to the trust is not considered an addition to
the principal of the trust. Thus, distributions to or for the
benefit of GC, are not subject to the provisions of chapter 13.
Example 2. Property transferred inter vivos that would have been
transferred to the same trust by the transferor's will. T is the
grantor of a trust that was irrevocable on September 25, 1985. T's
will, which was executed before October 22, 1986, and not amended
thereafter, provides that, upon T's death, the entire estate will
pour over into T's trust. On October 1, 1985, T transfers $100,000
to the trust. While T's will otherwise qualifies for relief under
the transition rule in paragraph (b)(2) of this section, the
transition rule is not applicable unless T dies prior to January 1,
1987. Thus, if T dies after December 31, 1986, the transfer is
treated as an addition to the trust for purposes of any distribution
made from the trust after the transfer to the trust on October 1,
1985. If T dies before January 1, 1987, the entire trust (as well as
any distributions from or terminations of interests in the trust
prior to T's death) is exempt, under paragraph (b)(2) of this
section, from chapter 13 because the $100,000 would have been added
to the trust under a will that would have qualified under paragraph
(b)(2) of this section. In either case, for any generation-skipping
transfers made after the transfer to the trust on October 1, 1985,
but before T's death, the $100,000 is treated as an addition to the
trust and a proportionate amount of the trust is subject to chapter
13.
Example 3. Pour over to a revocable trust. T and S are the
settlors of separate revocable trusts with equal values. Both trusts
were established for the benefit of skip persons (as
[[Page 66910]]
defined in section 2613). S dies on December 1, 1985, and under the
provisions of S's trust, the principal pours over into T's trust. If
T dies before January 1, 1987, the entire trust is excluded under
paragraph (b)(2) of this section from the operation of chapter 13.
If T dies after December 31, 1986, the entire trust is subject to
the generation-skipping transfer tax provisions because T's trust is
not a trust described in paragraph (b)(1) or (2) of this section. In
the latter case, the fact that S died before January 1, 1987, is
irrelevant because the principal of S's trust was added to a trust
that never qualified under the transition rules of paragraph (b)(1)
or (2) of this section.
Example 4. Pour over to exempt trust. Assume the same facts as
in Example 3, except upon the death of S on December 1, 1985, S's
trust continues as an irrevocable trust and that the principal of
T's trust is to be paid over upon T's death to S's trust. Again, if
T dies before January 1, 1987, S's entire trust falls within the
provisions of paragraph (b)(2) of this section. However, if T dies
after December 31, 1986, the pour-over is considered an addition to
the trust. Therefore, S's trust is not a trust excluded under
paragraph (b)(2) of this section because an addition is made to the
trust.
Example 5. Lapse of a general power of appointment. S, the
spouse of the settlor of an irrevocable trust that was created in
1980, had, on September 25, 1985, a general power of appointment
over the trust assets. The trust provides that should S fail to
exercise the power of appointment the property is to remain in the
trust. On October 21, 1986, S executed a will under which S failed
to exercise the power of appointment. If S dies before January 1,
1987, without having exercised the power in a manner which results
in the creation of, or increase in the amount of, a generation-
skipping transfer (or amended the will in a manner that results in
the creation of, or increase in the amount of, a generation-skipping
transfer), transfers pursuant to the trust or the will are not
subject to chapter 13 because the trust is an irrevocable trust and
the will qualifies under paragraph (b)(2) of this section.
Example 6. Lapse of general power of appointment held by
intestate decedent. Assume the same facts as in Example 5, except on
October 22, 1986, S did not have a will and that S dies after that
date. Upon S's death, or upon the prior exercise or release of the
power, the value of the entire trust is treated as having been
distributed to S, and S is treated as having made an addition to the
trust in the amount of the entire principal. Any distribution or
termination pursuant to the trust occurring after S's death is
subject to chapter 13. It is immaterial whether S's death occurs
before January 1, 1987, since paragraph (b)(2) of this section is
only applicable where a will or revocable trust was executed before
October 22, 1986.
(c) Additional effective dates. Except as otherwise provided, the
regulations under Secs. 26.2611-1, 26.2612-1, 26.2613-1, 26.2632-1,
26.2641-1, 26.2642-1, 26.2642-2, 26.2642-3, 26.2642-4, 26.2642-5,
26.2652-1, 26.2652-2, 26.2653-1, 26.2654-1, 26.2663-1, and 26.2663-2
are effective with respect to generation-skipping transfers as defined
in Sec. 26.2611-1 made on or after [December 27, 1995]. However,
taxpayers may, at their option, rely on these regulations in the case
of generation-skipping transfers made, and trusts that became
irrevocable, after December 23, 1992, and before December 27, 1995.
Sec. 26.2611-1 Generation-skipping transfer defined.
A generation-skipping transfer (GST) is an event that is either a
direct skip, a taxable distribution, or a taxable termination. See
Sec. 26.2612-1 for the definition of these terms. The determination as
to whether an event is a GST is made by reference to the most recent
transfer subject to the estate or gift tax. See Sec. 26.2652-1(a)(2)
for determining whether a transfer is subject to Federal estate or gift
tax.
Sec. 26.2612-1 Definitions.
(a) Direct skip--(1) In general. A direct skip is a transfer to a
skip person that is subject to Federal estate or gift tax. If property
is transferred to a trust, the transfer is a direct skip only if the
trust is a skip person. Only one direct skip occurs when a single
transfer of property skips two or more generations. See paragraph (d)
of this section for the definition of skip person. See Sec. 26.2652-
1(b) for the definition of trust. See Sec. 26.2632-1(c)(4) for the time
that a direct skip occurs if the transferred property is subject to an
estate tax inclusion period.
(2) Special rule for certain lineal descendants--(i) In general.
Solely for the purpose of determining whether a transfer to or for the
benefit of a lineal descendant of the transferor, the transferor's
spouse, or a former spouse of the transferor is a direct skip, the
generation assignment of the descendant is determined by disregarding
the generation of a predeceased individual who was both an ancestor of
the descendant and a lineal descendant of the transferor, the
transferor's spouse, or a former spouse of the transferor (a
predeceased child). If a transfer to a trust would be a direct skip but
for this paragraph, any generation assignment determined under this
paragraph continues to apply in determining whether any subsequent
distribution from (or termination of an interest in) the portion of the
trust attributable to that transfer is a GST. A living descendant who
dies no later than 90 days after the subject transfer is treated as
having predeceased the transferor to the extent that either the
governing instrument or applicable local law provides that such
individual shall be treated as predeceasing the transferor. Except as
provided in this paragraph (a)(2), a living descendant is not treated
as a predeceased child solely by reason of applicable local law; e.g.,
an individual is not treated as a predeceased child solely because
state law treats an individual executing a disclaimer as having
predeceased the transferor of the disclaimed property. See
Sec. 26.2652-1(a)(1) for the definition of transferor. See paragraph
(e) of this section for the definition of interest in trust.
(ii) Special rule. If a transferor makes an addition to an existing
trust after the death of an individual described in paragraph (a)(2)(i)
of this section (so that the transferor would be assigned to a lower
generation by reason of that death), the additional property is treated
as being held in a separate trust for purposes of chapter 13 and the
provisions of Sec. 26.2654-1(a)(2) apply as if the portions of the
single trust had separate transferors. Subsequent additions are treated
as additions to the appropriate portion of the single trust.
(b) Taxable termination--(1) In general. Except as otherwise
provided in this paragraph (b), a taxable termination is a termination
(occurring for any reason) of an interest in trust unless--
(i) A transfer subject to Federal estate or gift tax occurs with
respect to the property held in the trust at the time of the
termination (i.e., a new transferor is determined with respect to the
property);
(ii) Immediately after the termination, a person who is not a skip
person has an interest in the trust; or
(iii) At no time after the termination may a distribution, other
than a distribution the probability of which occurring is so remote as
to be negligible (including a distribution at the termination of the
trust) be made from the trust to a skip person. For this purpose, the
probability that a distribution will occur is so remote as to be
negligible only if it can be ascertained by actuarial standards that
there is less than a 5 percent probability that the distribution will
occur.
(2) Partial termination. If a distribution of a portion of trust
property is made to a skip person by reason of a termination occurring
on the death of a lineal descendant of the transferor, the termination
is a taxable termination with respect to the distributed property.
(3) Simultaneous terminations. A simultaneous termination of two or
[[Page 66911]]
more interests creates only one taxable termination.
(c) Taxable distribution--(1) In general. A taxable distribution is
a distribution of income or principal from a trust to a skip person
unless the distribution is a taxable termination or a direct skip. If
any portion of GST tax (including penalties and interest thereon)
imposed on a distributee is paid from the distributing trust, the
payment is an additional taxable distribution to the distributee. For
purposes of chapter 13, the additional distribution is treated as
having been made on the last day of the calendar year in which the
original taxable distribution is made. If Federal estate or gift tax is
imposed on any individual with respect to an interest in property held
by a trust, the interest in property is treated as having been
distributed to the individual to the extent that the value of the
interest is subject to Federal estate or gift tax. See Sec. 26.2652-
1(a)(6) Example 5, regarding the treatment of the lapse of a power of
appointment as a transfer to a trust.
(2) Look-through rule not to apply. Solely for purposes of
determining whether any transfer from a trust to another trust is a
taxable distribution, the rules of section 2651(e)(2) do not apply. If
the transferring trust and the recipient trust have the same
transferor, see Sec. 26.2642-4(a) (1) and (2) for rules for recomputing
the applicable fraction of the recipient trust.
(d) Skip person. A skip person is--
(1) An individual assigned to a generation more than one generation
below that of the transferor (determined under the rules of section
2651); or
(2) A trust if--
(i) All interests in the trust are held by skip persons; or
(ii) No person holds an interest in the trust and no distributions,
other than a distribution the probability of which occurring is so
remote as to be negligible (including distributions at the termination
of the trust), may be made after the transfer to a person other than a
skip person. For this purpose, the probability that a distribution will
occur is so remote as to be negligible only if it can be ascertained by
actuarial standards that there is less than a 5 percent probability
that the distribution will occur.
(e) Interest in trust--(1) In general. An interest in trust is an
interest in property held in trust as defined in section 2652(c) and
these regulations. An interest in trust exists if a person--
(i) Has a present right to receive trust principal or income;
(ii) Is a permissible current recipient of trust principal or
income and is not described in section 2055(a); or
(iii) Is described in section 2055(a) and the trust is a charitable
remainder annuity trust or unitrust (as defined in section 664(d)) or a
pooled income fund (as defined in section 642(c)(5)).
(2) Exceptions--(i) Support obligations. In general, an individual
has a present right to receive trust income or principal if trust
income or principal may be used to satisfy the individual's support
obligations. However, an individual does not have an interest in a
trust merely because a support obligation of that individual may be
satisfied by a distribution that is either within the discretion of a
fiduciary or pursuant to provisions of local law substantially
equivalent to the Uniform Gifts (Transfers) to Minors Act.
(ii) Certain interests disregarded. An interest which is used
primarily to postpone or avoid the GST tax is disregarded for purposes
of chapter 13. An interest is considered as used primarily to postpone
or avoid the GST tax if a significant purpose for the creation of the
interest is to postpone or avoid the tax.
(3) Disclaimers. An interest does not exist to the extent it is
disclaimed pursuant to a disclaimer that constitutes a qualified
disclaimer under section 2518.
(f) Examples. The following examples illustrate the provisions of
this section. Unless stated otherwise, paragraph (a)(2) of this
section, which assigns descendants to a higher generation when there is
a predeceased ancestor, does not apply.
Example 1. Direct skip. T gratuitously conveys Blackacre to T's
grandchild. Because the transfer is a transfer to a skip person of
property subject to Federal gift tax, it is a direct skip.
Example 2. Direct skip of more than one generation. T
gratuitously conveys Blackacre to T's great-grandchild. The transfer
is a direct skip. Only one GST tax is imposed on the direct skip
although two generations are skipped by the transfer.
Example 3. Withdrawal power in trust. T transfers $50,000 to a
new trust providing that trust income is to be paid to T's child, C,
for life and, on C's death, the trust principal is to be paid to T's
descendants. Under the terms of the trust, T grants four
grandchildren the right to withdraw $10,000 from the trust for a 60
day period following the transfer. Since C, who is not a skip
person, has an interest in the trust, the trust is not a skip
person. T's transfer to the trust is not a direct skip.
Example 4. Taxable termination. T establishes an irrevocable
trust under which the income is to be paid to T's child, C, for
life. On the death of C, the trust principal is to be paid to T's
grandchild, GC. Since C has an interest in the trust, the trust is
not a skip person and the transfer to the trust is not a direct
skip. If C dies survived by GC, a taxable termination occurs at C's
death because C's interest in the trust terminates and thereafter
the trust property is held by a skip person who occupies a lower
generation than C.
Example 5. Direct skip of property held in trust. T establishes
a testamentary trust under which the income is to be paid to T's
surviving spouse, S, for life and the remainder is to be paid to a
grandchild of T and S. T's executor elects to treat the trust as
qualified terminable interest property under section 2056(b)(7). The
transfer to the trust is not a direct skip because S, a person who
is not a skip person, holds a present right to receive income from
the trust. Upon S's death, the trust property is included in S's
gross estate under section 2044 and passes directly to a skip
person. The GST occurring at that time is a direct skip because it
is a transfer subject to chapter 11. The fact that the interest
created by T is terminated at S's death is immaterial because S
becomes the transferor at the time of the transfer subject to
chapter 11.
Example 6. Predeceased ancestor exception. T establishes an
irrevocable trust providing that trust income is to be paid to T's
grandchild, GC, for 5 years. At the end of the 5-year period, the
trust is to terminate and the principal is to be distributed to GC.
T's child, C, a parent of GC, is deceased at the time T establishes
the trust. Therefore, GC is treated as a child of T rather than as a
grandchild. As a result, GC is not a skip person, and the initial
transfer to the trust is not a direct skip. Similarly, distributions
to GC during the term of the trust and at the termination of the
trust will not be GSTs.
Example 7. Predeceased ancestor exception not applicable. The
facts are the same as in Example 6, except the trust income is to be
paid to T's spouse, S, during the first two years of the trust.
Since S has an interest in the trust, the trust is not a skip person
and the transfer by T is not a direct skip. Since the transfer is
not a direct skip, the predeceased ancestor rule does not apply and
GC is not treated as the child of T. A taxable termination occurs at
the expiration of S's interest.
Example 8. Taxable termination. T establishes an irrevocable
trust for the benefit of T's child, C, T's grandchild, GC, and T's
great-grandchild, GGC. Under the terms of the trust, income and
principal may be distributed to any or all of the living
beneficiaries at the discretion of the trustee. Upon the death of
the second beneficiary to die, the trust principal is to be paid to
the survivor. C dies first. A taxable termination occurs at that
time because, immediately after C's interest terminates, all
interests in the trust are held by skip persons (GC and GGC).
Example 9. Taxable termination resulting from distribution. The
facts are the same as in Example 8, except twenty years after C's
death the trustee exercises its discretionary power and distributes
the entire principal to GGC. The distribution results in a taxable
termination because GC's interest in the trust terminates as a
result of the distribution of
[[Page 66912]]
the entire trust property to GGC, a skip person. The result would be
the same if the trustee retained sufficient funds to pay the GST tax
due by reason of the taxable termination, as well as any expenses of
winding up the trust.
Example 10. Simultaneous termination of interests of more than
one beneficiary. T establishes an irrevocable trust for the benefit
of T's child, C, T's grandchild, GC, and T's great-grandchild, GGC.
Under the terms of the trust, income and principal may be
distributed to any or all of the living beneficiaries at the
discretion of the trustee. Upon the death of C, the trust property
is to be distributed to GGC if then living. If C is survived by both
GC and GGC, both C's and GC's interests in the trust will terminate
on C's death. However, because both interests will terminate at the
same time and as a result of one event, only one taxable termination
occurs.
Example 11. Partial taxable termination. T creates an
irrevocable trust providing that trust income is to be paid to T's
children, A and B, in such proportions as the trustee determines for
their joint lives. On the death of the first child to die, one-half
of the trust principal is to be paid to T's then living
grandchildren. The balance of the trust principal is to be paid to
T's grandchildren on the death of the survivor of A and B. If A
predeceases B, the distribution occurring on the termination of A's
interest in the trust is a taxable termination and not a taxable
distribution. It is a taxable termination because the distribution
is a distribution of a portion of the trust that occurs as a result
of the death of A, a lineal descendant of T. It is immaterial that a
portion of the trust continues and that B, a person other than a
skip person, thereafter holds an interest in the trust.
Example 12. Taxable distribution. T establishes an irrevocable
trust under which the trust income is payable to T's child, C, for
life. When T's grandchild, GC, attains 35 years of age, GC is to
receive one-half of the principal. The remaining one-half of the
principal is to be distributed to GC on C's death. Assume that C
survives until GC attains age 35. When the trustee distributes one-
half of the principal to GC on GC's 35th birthday, the distribution
is a taxable distribution because it is a distribution to a skip
person and is neither a taxable termination nor a direct skip.
Example 13. Exercise of withdrawal right as taxable
distribution. The facts are the same as in Example 12, except GC
holds a continuing right to withdraw trust principal and after one
year GC withdraws $10,000. The withdrawal by GC is not a taxable
termination because the withdrawal does not terminate C's interest
in the trust. The withdrawal by GC is a taxable distribution to GC.
Example 14. Interest in trust. T establishes an irrevocable
trust under which the income is to be paid to T's child, C, for
life. On the death of C, the trust principal is to be paid to T's
grandchild, GC. Because C has a present right to receive income from
the trust, C has an interest in the trust. Because GC cannot
currently receive distributions from the trust, GC does not have an
interest in the trust.
Example 15. Support obligation. T establishes an irrevocable
trust for the benefit of T's grandchild, GC. The trustee has
discretion to distribute property for GC's support without regard to
the duty or ability of GC's parent, C, to support GC. Because GC is
a permissible current recipient of trust property, GC has an
interest in the trust. C does not have an interest in the trust
because the potential use of the trust property to satisfy C's
support obligation is within the discretion of a fiduciary. C would
be treated as having an interest in the trust if the trustee was
required to distribute trust property for GC's support.
Sec. 26.2613-1 Skip person.
For the definition of skip person see Sec. 26.2612-1(d).
Sec. 26.2632-1 Allocation of GST exemption.
(a) General rule. Except as otherwise provided in this section, an
individual or the individual's executor may allocate the individual's
$1 million GST exemption at any time from the date of the transfer
through the date for filing the individual's Federal estate tax return
(including any extensions for filing that have been actually granted).
If no estate tax return is required to be filed, the GST exemption may
be allocated at any time through the date a Federal estate tax return
would be due if a return were required to be filed (including any
extensions actually granted). If property is held in trust, the
allocation of GST exemption is made to the entire trust rather than to
specific trust assets. If a transfer is a direct skip to a trust, the
allocation of GST exemption to the transferred property is also treated
as an allocation of GST exemption to the trust for purposes of future
GSTs with respect to the trust by the same transferor.
(b) Lifetime allocations--(1) Automatic allocation to direct
skips--(i) In general. If a direct skip occurs during the transferor's
lifetime, the transferor's GST exemption not previously allocated
(unused GST exemption) is automatically allocated to the transferred
property (but not in excess of the fair market value of the property on
the date of the transfer). The transferor may prevent the automatic
allocation of GST exemption by describing on a timely-filed United
States Gift (and Generation-Skipping Transfer) Tax Return (Form 709)
the transfer and the extent to which the automatic allocation is not to
apply. In addition, a timely-filed Form 709 accompanied by payment of
the GST tax (as shown on the return with respect to the direct skip) is
sufficient to prevent an automatic allocation of GST exemption with
respect to the transferred property. See paragraph (c)(4) of this
section for special rules in the case of direct skips treated as
occurring at the termination of an estate tax inclusion period.
(ii) Time for filing Form 709. A Form 709 is timely filed if it is
filed on or before the date required for reporting the transfer if it
were a taxable gift (i.e., the date prescribed by section 6075(b),
including any extensions to file actually granted (the due date)).
Except as provided in paragraph (b)(1)(iii) of this section, the
automatic allocation of GST exemption (or the election to prevent the
allocation, if made) is irrevocable after the due date. An automatic
allocation of GST exemption is effective as of the date of the transfer
to which it relates. Except as provided above, a Form 709 need not be
filed to report an automatic allocation.
(iii) Transitional rule. An election to prevent an automatic
allocation of GST exemption filed on or before January 26, 1996,
becomes irrevocable on July 24, 1996.
(2) Allocation to other transfers--(i) In general. An allocation of
GST exemption to property transferred during the transferor's lifetime,
other than in a direct skip, is made on Form 709. The allocation must
clearly identify the trust to which the allocation is being made, the
amount of GST exemption allocated to it, and if the allocation is late
or if an inclusion ratio greater than zero is claimed, the value of the
trust assets at the effective date of the allocation. See paragraph
(b)(2)(ii) of this section. The allocation should also state the
inclusion ratio of the trust after the allocation. Except as otherwise
provided in this paragraph, an allocation of GST exemption may be made
by a formula; e.g., the allocation may be expressed in terms of the
amount necessary to produce an inclusion ratio of zero. However,
formula allocations made with respect to charitable lead annuity trusts
are not valid except to the extent they are dependent on values as
finally determined for Federal estate or gift tax purposes. With
respect to a timely allocation, an allocation of GST exemption becomes
irrevocable after the due date of the return. Except as provided in
Sec. 26.2642-3 (relating to charitable lead annuity trusts), an
allocation of GST exemption to a trust is void to the extent the amount
allocated exceeds the amount necessary to obtain an inclusion ratio of
zero with respect to the trust. See Sec. 26.2642-1 for the definition
of inclusion ratio. An allocation is also void if the allocation is
made with respect to a trust that has no GST potential with respect to
the transferor making the allocation, at the time of the allocation.
For this purpose, a trust has GST potential even if the
[[Page 66913]]
possibility of a GST is so remote as to be negligible.
(ii) Effective date of allocation--(A) In general. (1) Except as
otherwise provided, an allocation of GST exemption is effective as of
the date of any transfer as to which the Form 709 on which it is made
is a timely filed return (a timely allocation). If more than one timely
allocation is made, the earlier allocation is modified only if the
later allocation clearly identifies the transfer and the nature and
extent of the modification. Except as provided in paragraph (d)(1) of
this section, an allocation to a trust made on a Form 709 filed after
the due date for reporting a transfer to the trust (a late allocation)
is effective on the date the Form 709 is filed and is deemed to precede
in point of time any taxable event occurring on such date. For purposes
of this paragraph (b)(2)(ii), the Form 709 is deemed filed on the date
it is postmarked to the Internal Revenue Service Center. See
Sec. 26.2642-2 regarding the effect of a late allocation in determining
the inclusion ratio, etc. See paragraph (c)(1) of this section
regarding allocation of GST exemption to property subject to an estate
tax inclusion period. If it is unclear whether an allocation of GST
exemption on a Form 709 is a late or a timely allocation to a trust,
the allocation is effective in the following order--
(i) To any transfer to the trust disclosed on the return as to
which the return is a timely return;
(ii) As a late allocation; and
(iii) To any transfer to the trust not disclosed on the return as
to which the return would be a timely return.
(2) A late allocation to a trust may be made on a Form 709 that is
timely filed with respect to another transfer. A late allocation is
irrevocable when made.
(B) Amount of allocation. If other transfers exist with respect to
which GST exemption could be allocated under paragraphs
(b)(2)(ii)(A)(1) (ii) and (iii), any GST exemption allocated under
paragraph (b)(2)(ii)(A)(1)(i) of this section is allocated in an amount
equal to the value of the transferred property as reported on the Form
709. Thus, if the GST exemption allocated on the Form 709 exceeds the
value of the transfers reported on that return that have generation-
skipping potential, the initial allocation under paragraph
(b)(2)(ii)(A)(1)(i) of this section is in the amount of the value of
those transfers as reported on that return. Any remaining amount of GST
exemption allocated on that return is then allocated pursuant to
paragraphs (b)(2)(ii)(A)(1) (ii) and (iii) of this section,
notwithstanding any subsequent upward adjustment in value of the
transfers reported on the return.
(iii) Examples. The following examples illustrate the provisions of
this paragraph (b):
Example 1. Modification of allocation of GST exemption. T
transfers $100,000 to an irrevocable generation-skipping trust on
December 1, 1996. The transfer to the trust is not a direct skip.
The date prescribed for filing the gift tax return reporting the
taxable gift is April 15, 1997. On February 10, 1997, T files a Form
709 allocating $50,000 of GST exemption to the trust. On April 10 of
the same year, T files an amended Form 709 allocating $100,000 of
GST exemption to the trust in a manner that clearly indicates the
intention to modify and supersede the prior allocation with respect
to the 1996 transfer. The allocation made on the April 10 return
supersedes the prior allocation because it is made on a timely-filed
Form 709 that clearly identifies the trust and the nature and extent
of the modification of GST exemption allocation. The allocation of
$100,000 of GST exemption to the trust is effective as of December
1, 1996. The result would be the same if the amended Form 709
decreased the amount of the GST exemption allocated to the trust.
Example 2. Modification of allocation of GST exemption. The
facts are the same as in Example 1, except on July 10, 1997, T files
a Form 709 attempting to reduce the earlier allocation. The return
is not a timely-filed return. The $100,000 GST exemption allocated
to the trust, as amended on April 10, 1997, remains in effect
because an allocation, once made, is irrevocable and may not be
modified after the last date on which a timely-filed Form 709 can be
filed.
Example 3. Effective date of late allocation of GST exemption. T
transfers $100,000 to an irrevocable generation-skipping trust on
December 1, 1996. The transfer to the trust is not a direct skip.
The date prescribed for filing the gift tax return reporting the
taxable gift is April 15, 1997. On December 1, 1997, T files a Form
709 and allocates $50,000 to the trust. The allocation is effective
as of December 1, 1997.
Example 4. Effective date of late allocation of GST exemption. T
transfers $100,000 to a generation-skipping trust on December 1,
1996, in a transfer that is not a direct skip. T does not make an
allocation of GST exemption on a timely-filed Form 709. On July 1,
1997, the trustee makes a taxable distribution from the trust to T's
grandchild in the amount of $30,000. Immediately prior to the
distribution, the value of the trust assets was $150,000. On the
same date, T allocates GST exemption to the trust in the amount of
$50,000. The allocation of GST exemption on the date of the transfer
is treated as preceding in point of time the taxable distribution.
At the time of the GST, the trust has an inclusion ratio of .6667 (1
- (50,000/150,000)).
Example 5. Automatic allocation to split-gift direct skip. On
May 15, 1996, T transfers $50,000 to a trust in a direct skip. T
does not file a timely gift tax return electing out of the automatic
allocation. On April 30, 1998, T and T's spouse, S, file an initial
gift tax return for 1996 on which they consent, pursuant to section
2513, to have the gift treated as if one-half had been made by each.
As a result of the election under section 2513, which is retroactive
to the date of T's transfer, T and S are each treated as the
transferor of one-half of the property transferred in the direct
skip. Thus, $25,000 of T's unused GST exemption and $25,000 of S's
unused GST exemption is automatically allocated to the trust. Both
allocations are effective on and after the date that T made the
transfer.
(c) Special rules during an estate tax inclusion period--(1) In
general. An allocation of GST exemption (including an automatic
allocation) to property subject to an estate tax inclusion period
(ETIP) that is made prior to termination of the ETIP cannot be revoked,
but becomes effective no earlier than the date of any termination of
the ETIP with respect to the trust. Where an allocation has not been
made prior to the termination of the ETIP, an allocation is effective
at the termination of the ETIP during the transferor's lifetime if made
by the due date for filing a Form 709 that would apply to a taxable
gift occurring at the time the ETIP terminates (timely ETIP return). An
allocation is effective in the case of the termination of the ETIP on
the death of the transferor as provided in paragraph (d) of this
section. If any part of a trust is subject to an ETIP, the entire trust
is subject to the ETIP. See Sec. 26.2642-1(b)(2) for rules determining
the inclusion ratio applicable in the case of GSTs during an ETIP.
(2) Estate tax inclusion period defined--(i) In general. An ETIP is
the period during which, should death occur, the value of transferred
property would be includible (other than by reason of section 2035) in
the gross estate of--
(A) The transferor; or
(B) The spouse of the transferor.
(ii) Exceptions--(A) For purposes of paragraph (c)(2) of this
section, the value of transferred property is not considered as being
subject to inclusion in the gross estate of the transferor or the
spouse of the transferor if the possibility that the property will be
included is so remote as to be negligible. A possibility is so remote
as to be negligible if it can be ascertained by actuarial standards
that there is less than a 5 percent probability that the property will
be included in the gross estate.
(B) For purposes of paragraph (c)(2) of this section, the value of
transferred property is not considered as being subject to inclusion in
the gross estate of the spouse of the transferor, if the spouse
possesses with respect to any transfer to the trust, a right to
withdraw
[[Page 66914]]
no more than the greater of $5,000 or 5 percent of the trust corpus,
and such withdrawal right terminates no later than 60 days after the
transfer to the trust.
(C) The rules of this paragraph (c)(2) do not apply to qualified
terminable interest property with respect to which the special election
under Sec. 26.2652-2 has been made.
(3) Termination of an ETIP. An ETIP terminates on the first to
occur of--
(i) The death of the transferor;
(ii) The time at which no portion of the property is includible in
the transferor's gross estate (other than by reason of section 2035)
or, in the case of an individual who is a transferor solely by reason
of an election under section 2513, the time at which no portion would
be includible in the gross estate of the individual's spouse (other
than by reason of section 2035);
(iii) The time of a GST, but only with respect to the property
involved in the GST; or
(iv) In the case of an ETIP arising by reason of an interest or
power held by the transferor's spouse under subsection (c)(2)(i)(B) of
this section, at the first to occur of--
(A) The death of the spouse; or
(B) The time at which no portion of the property would be
includible in the spouse's gross estate (other than by reason of
section 2035).
(4) Treatment of direct skips. If property transferred to a skip
person is subject to an ETIP, the direct skip is treated as occurring
on the termination of the ETIP.
(5) Examples. The following examples illustrate the rules of this
section as they apply to the termination of an ETIP during the lifetime
of the transferor. In each example assume that T transfers $100,000 to
an irrevocable trust:
Example 1. Allocation of GST exemption during ETIP. The trust
instrument provides that trust income is to be paid to T for 9 years
or until T's prior death. The trust principal is to be paid to T's
grandchild on the termination of T's income interest. If T dies
within the 9-year period, the value of the trust principal is
includible in T's gross estate under section 2036(a). Thus, the
trust is subject to an ETIP. T files a timely Form 709 reporting the
transfer and allocating $100,000 of GST exemption to the trust. The
allocation of GST exemption to the trust is not effective until the
termination of the ETIP.
Example 2. Effect of prior allocation on termination of ETIP.
The facts are the same as in Example 1, except the trustee has the
power to invade trust principal on behalf of T's grandchild, GC,
during the term of T's income interest. In year 4, when the value of
the trust is $200,000, the trustee distributes $15,000 to GC. The
distribution is a taxable distribution. The ETIP with respect to the
property distributed to GC terminates at the time of the taxable
distribution. See paragraph (c)(3)(iii) of this section. Solely for
purposes of determining the trust's inclusion ratio with respect to
the taxable distribution, the prior $100,000 allocation of GST
exemption (as well as any additional allocation made on a timely
ETIP return) is effective immediately prior to the taxable
distribution. See Sec. 26.2642-1(b)(2). The trust's inclusion ratio
with respect to the taxable distribution is therefore .50
(1-(100,000/200,000)).
Example 3. Split-gift transfers subject to ETIP. The trust
instrument provides that trust income is to be paid to T for 9 years
or until T's prior death. The trust principal is to be paid to T's
grandchild on the termination of T's income interest. T files a
timely Form 709 reporting the transfer. T's spouse, S, consents to
have the gift treated as made one-half by S under section 2513.
Because S is treated as transferring one-half of the property to T's
grandchild, S becomes the transferor of one-half of the trust for
purposes of chapter 13. Because the value of the trust would be
includible in T's gross estate if T died immediately after the
transfer, S's transfer is subject to an ETIP. If S should die prior
to the termination of the trust, S's executor may allocate S's GST
exemption to the trust, but only to the portion of the trust for
which S is treated as the transferor. However, the allocation does
not become effective until the earlier of the expiration of T's
income interest or T's death.
Example 4. Transfer of retained interest as ETIP termination.
The trust instrument provides that trust income is to be paid to T
for 9 years or until T's prior death. The trust principal is to be
paid to T's grandchild on the termination of T's income interest.
Four years after the initial transfer, T transfers the income
interest to T's sibling. The ETIP with respect to the trust
terminates on T's transfer of the income interest because, after the
transfer, the trust property would not be includible in T's gross
estate (other than by reason of section 2035) if T died at that
time.
(d) Allocations after the transferor's death--(1) Allocation by
executor. Except as otherwise provided in this paragraph (d), an
allocation of a decedent's unused GST exemption by the executor of the
decedent's estate is made on the appropriate United States Estate (and
Generation-Skipping Transfer) Tax Return (Form 706 or Form 706NA) filed
on or before the date prescribed for filing the return by section
6075(a) (including any extensions actually granted (the due date)). An
allocation of GST exemption with respect to property included in the
gross estate of a decedent is effective as of the date of death. A
timely allocation of GST exemption by an executor with respect to a
lifetime transfer of property that is not included in the transferor's
gross estate is made on a Form 709. A late allocation of GST exemption
by an executor, other than an allocation that is deemed to be made
under section 2632(b)(1), with respect to a lifetime transfer of
property is made on Form 706 or Form 706NA and is effective as of the
date the allocation is filed. An allocation of GST exemption to a trust
(whether or not funded at the time the Form 706 or Form 706NA is filed)
is effective if the notice of allocation clearly identifies the trust
and the amount of the decedent's GST exemption allocated to the trust.
An executor may allocate the decedent's GST exemption by use of a
formula. For purposes of this section, an allocation is void if the
allocation is made for a trust that has no GST potential with respect
to the transferor for whom the allocation is being made, as of the date
of the transferor's death. For this purpose, a trust has GST potential
even if the possibility of a GST is so remote as to be negligible.
(2) Automatic allocation after death. A decedent's unused GST
exemption is automatically allocated on the due date for filing Form
706 or Form 706NA to the extent not otherwise allocated by the
decedent's executor on or before that date. The automatic allocation
occurs whether or not a return is actually required to be filed. Unused
GST exemption is allocated pro rata (subject to the rules of
Sec. 26.2642-2(b)), on the basis of the value of the property as
finally determined for purposes of chapter 11 (chapter 11 value), first
to direct skips treated as occurring at the transferor's death. The
balance, if any, of unused GST exemption is allocated pro rata (subject
to the rules of Sec. 26.2642-2(b)) on the basis of the chapter 11 value
of the nonexempt portion of the trust property (or in the case of
trusts that are not included in the gross estate, on the basis of the
date of death value of the trust) to trusts with respect to which a
taxable termination may occur or from which a taxable distribution may
be made. The automatic allocation of GST exemption is irrevocable, and
an allocation made by the executor after the automatic allocation is
made is ineffective. No automatic allocation of GST exemption is made
to a trust that will have a new transferor with respect to the entire
trust prior to the occurrence of any GST with respect to the trust. In
addition, no automatic allocation of GST exemption is made to a trust
if, during the nine month period ending immediately after the death of
the transferor--
(i) No GST has occurred with respect to the trust; and
(ii) At the end of such period no future GST can occur with respect
to the trust.
[[Page 66915]]
Sec. 26.2641-1 Applicable rate of tax.
The rate of tax applicable to any GST (applicable rate) is
determined by multiplying the maximum Federal estate tax rate in effect
at the time of the GST by the inclusion ratio (as defined in
Sec. 26.2642-1). For this purpose, the maximum Federal estate tax rate
is the maximum rate set forth under section 2001(c) (without regard to
section 2001(c)(2)).
Sec. 26.2642-1 Inclusion ratio.
(a) In general. Except as otherwise provided in this section, the
inclusion ratio is determined by subtracting the applicable fraction
(rounded to the nearest one-thousandth (.001)) from 1. In rounding the
applicable fraction to the nearest one-thousandth, any amount that is
midway between one one-thousandth and another one-thousandth is rounded
up to the higher of those two amounts.
(b) Numerator of applicable fraction--(1) In general. Except as
otherwise provided in this paragraph (b), and in Secs. 26.2642-3
(providing a special rule for charitable lead annuity trusts) and
26.2642-4 (providing rules for the redetermination of the applicable
fraction), the numerator of the applicable fraction is the amount of
GST exemption allocated to the trust (or to the transferred property in
the case of a direct skip not in trust).
(2) GSTs occurring during an ETIP--(i) In general. For purposes of
determining the inclusion ratio with respect to a taxable termination
or a taxable distribution that occurs during an ETIP, the numerator of
the applicable fraction is the sum of--
(A) The GST exemption previously allocated to the trust (including
any allocation made to the trust prior to any taxable termination or
distribution) reduced (but not below zero) by the nontax amount of any
prior GSTs with respect to the trust; and
(B) Any GST exemption allocated to the trust on a timely ETIP
return filed after the termination of the ETIP. See Sec. 26.2632-
1(c)(5) Example 2.
(ii) Nontax amount of a prior GST. (1) The nontax amount of a prior
GST with respect to the trust is the amount of the GST multiplied by
the applicable fraction attributable to the trust at the time of the
prior GST.
(2) For rules regarding the allocation of GST exemption to property
during an ETIP, see Sec. 26.2632-1(c).
(c) Denominator of applicable fraction--(1) In general. Except as
otherwise provided in this paragraph (c) and in Secs. 26.2642-3 and
26.2642-4, the denominator of the applicable fraction is the value of
the property transferred to the trust (or transferred in a direct skip
not in trust) (as determined under Sec. 26.2642-2) reduced by the sum
of--
(i) Any Federal estate tax and any State death tax incurred by
reason of the transfer that is chargeable to the trust and is actually
recovered from the trust;
(ii) The amount of any charitable deduction allowed under section
2055, 2106, or 2522 with respect to the transfer; and
(iii) In the case of a direct skip, the value of the portion of the
transfer that is a nontaxable gift. See paragraph (c)(3) of this
section for the definition of nontaxable gift.
(2) Zero denominator. If the denominator of the applicable fraction
is zero, the inclusion ratio is zero.
(3) Nontaxable gifts. Generally, for purposes of chapter 13, a
transfer is a nontaxable gift to the extent the transfer is excluded
from taxable gifts by reason of section 2503(b) (after application of
section 2513) or section 2503(e). However, a transfer to a trust for
the benefit of an individual is not a nontaxable gift for purposes of
this section unless--
(i) Trust principal or income may, during the individual's
lifetime, be distributed only to or for the benefit of the individual;
and
(ii) The assets of the trust will be includible in the gross estate
of the individual if the individual dies before the trust terminates.
(d) Examples. The following examples illustrate the provisions of
this section. See Sec. 26.2652-2(d) Examples 2 and 3 for illustrations
of the computation of the inclusion ratio where the special (reverse
QTIP) election may be applicable.
Example 1. Computation of the inclusion ratio. T transfers
$100,000 to a newly-created irrevocable trust providing that income
is to be accumulated for 10 years. At the end of 10 years, the
accumulated income is to be distributed to T's child, C, and the
trust principal is to be paid to T's grandchild. T allocates $40,000
of T's GST exemption to the trust on a timely-filed gift tax return.
The applicable fraction with respect to the trust is .40 ($40,000
(the amount of GST exemption allocated to the trust) over $100,000
(the value of the property transferred to the trust)). The inclusion
ratio is .60 (1 - .40). If the maximum Federal estate tax rate is 55
percent at the time of a GST, the rate of tax applicable to the
transfer (applicable rate) will be .333 (55 percent (the maximum
estate tax rate) x .60 (the inclusion ratio)).
Example 2. Gift entirely nontaxable. On December 1, 1996, T
transfers $10,000 to an irrevocable trust for the benefit of T's
grandchild, GC. GC possesses a right to withdraw any contributions
to the trust such that the entire transfer qualifies for the annual
exclusion under section 2503(b). Under the terms of the trust, the
income is to be paid to GC for 10 years or until GC's prior death.
Upon the expiration of GC's income interest, the trust principal is
payable to GC or GC's estate. The transfer to the trust is a direct
skip. T made no prior gifts to or for the benefit of GC during 1996.
The entire $10,000 transfer is a nontaxable transfer. For purposes
of computing the tax on the direct skip, the denominator of the
applicable fraction is zero, and thus, the inclusion ratio is zero.
Example 3. Gift nontaxable in part. T transfers $12,000 to an
irrevocable trust for the benefit of T's grandchild, GC. Under the
terms of the trust, the income is to be paid to GC for 10 years or
until GC's prior death. Upon the expiration of GC's income interest,
the trust principal is payable to GC or GC's estate. Further, GC has
the right to withdraw $10,000 of any contribution to the trust such
that $10,000 of the transfer qualifies for the annual exclusion
under section 2503(b). The amount of the nontaxable transfer is
$10,000. Solely for purposes of computing the tax on the direct
skip, T's transfer is divided into two portions. One portion is
equal to the amount of the nontaxable transfer ($10,000) and has a
zero inclusion ratio; the other portion is $2,000 ($12,000 -
$10,000). With respect to the $2,000 portion, the denominator of the
applicable fraction is $2,000. Assuming that T has sufficient GST
exemption available, the numerator of the applicable fraction is
$2,000 (unless T elects to have the automatic allocation provisions
not apply). Thus, assuming T does not elect to have the automatic
allocation not apply, the applicable fraction is one ($2,000/$2,000
= 1) and the inclusion ratio is zero (1 - 1 = 0).
Example 4. Gift nontaxable in part. Assume the same facts as in
Example 3, except T files a timely Form 709 electing that the
automatic allocation of GST exemption not apply to the $12,000
transferred in the direct skip. T's transfer is divided into two
portions, a $10,000 portion with a zero inclusion ratio and a $2,000
portion with an applicable fraction of zero (0/$2,000 = 0) and an
inclusion ratio of one (1 - 0 = 1).
Sec. 26.2642-2 Valuation.
(a) Lifetime transfers--(1) In general. For purposes of determining
the denominator of the applicable fraction, the value of property
transferred during life is its fair market value on the effective date
of the allocation of GST exemption. In the case of a timely allocation
under Sec. 26.2632-1(b)(2)(ii), the denominator of the applicable
fraction is the fair market value of the property as finally determined
for purposes of chapter 12.
(2) Special rule for late allocations during life. If a transferor
makes a late allocation of GST exemption to a trust, the value of the
property transferred to the trust is the fair market value of the trust
assets determined on the effective date of the allocation of GST
exemption. Except as otherwise provided in this paragraph (a)(2), if a
transferor makes a
[[Page 66916]]
late allocation of GST exemption to a trust, the transferor may, solely
for purposes of determining the fair market value of the trust assets,
elect to treat the allocation as having been made on the first day of
the month during which the late allocation is made (valuation date). An
election under this paragraph (a)(2) is not effective with respect to a
life insurance policy or a trust holding a life insurance policy, if
the insured individual has died. An allocation subject to the election
contained in this paragraph (a)(2) is not effective until it is
actually filed with the Internal Revenue Service. The election is made
by stating on the Form 709 on which the allocation is made--
(i) That the election is being made;
(ii) The applicable valuation date; and
(iii) The fair market value of the trust assets on the valuation
date.
(b) Transfers at death--(1) In general. Except as provided in
paragraphs (b) (2) and (3) of this section, in determining the
denominator of the applicable fraction, the value of property included
in the decedent's gross estate is its value for purposes of chapter 11.
In the case of qualified real property with respect to which the
election under section 2032A is made, the value of the property is the
value determined under section 2032A provided the recapture agreement
described in section 2032A(d)(2) filed with the Internal Revenue
Service specifically provides for the signatories' consent to the
imposition of, and personal liability for, additional GST tax in the
event an additional estate tax is imposed under section 2032A(c). See
Sec. 26.2642-4(a)(4). If the recapture agreement does not contain these
provisions, the value of qualified real property as to which the
election under section 2032A is made is the fair market value of the
property determined without regard to the provisions of section 2032A.
(2) Special rule for pecuniary payments--(i) In general. If a
pecuniary payment is satisfied with cash, the denominator of the
applicable fraction is the pecuniary amount. If property other than
cash is used to satisfy a pecuniary payment, the denominator of the
applicable fraction is the pecuniary amount only if payment must be
made with property on the basis of the value of the property on--
(A) The date of distribution; or
(B) A date other than the date of distribution, but only if the
pecuniary payment must be satisfied on a basis that fairly reflects net
appreciation and depreciation (occurring between the valuation date and
the date of distribution) in all of the assets from which the
distribution could have been made.
(ii) Other pecuniary amounts payable in kind. The denominator of
the applicable fraction with respect to any property used to satisfy
any other pecuniary payment payable in kind is the date of distribution
value of the property.
(3) Special rule for residual transfers after payment of a
pecuniary payment--(i) In general. Except as otherwise provided in this
paragraph (b)(3), the denominator of the applicable fraction with
respect to a residual transfer of property after the satisfaction of a
pecuniary payment is the estate tax value of the assets available to
satisfy the pecuniary payment reduced, if the pecuniary payment carries
appropriate interest (as defined in paragraph (b)(4) of this section),
by the pecuniary amount. The denominator of the applicable fraction
with respect to a residual transfer of property after the satisfaction
of a pecuniary payment that does not carry appropriate interest is the
estate tax value of the assets available to satisfy the pecuniary
payment reduced by the present value of the pecuniary payment. For
purposes of this paragraph (b)(3)(i), the present value of the
pecuniary payment is determined by using--
(A) The interest rate applicable under section 7520 at the death of
the transferor; and
(B) The period between the date of the transferor's death and the
date the pecuniary amount is paid.
(ii) Special rule for residual transfers after pecuniary payments
payable in kind. The denominator of the applicable fraction with
respect to any residual transfer after satisfaction of a pecuniary
payment payable in kind is the date of distribution value of the
property distributed in satisfaction of the residual transfer, unless
the pecuniary payment must be satisfied on the basis of the value of
the property on--
(A) The date of distribution; or
(B) A date other than the date of distribution, but only if the
pecuniary payment must be satisfied on a basis that fairly reflects net
appreciation and depreciation (occurring between the date of death and
the date of distribution) in all of the assets from which the
distribution could have been made.
(4) Appropriate interest--(i) In general. For purposes of this
section and Sec. 26.2654-1 (relating to certain trusts treated as
separate trusts), appropriate interest means that interest must be
payable from the date of death of the transferor (or from the date
specified under applicable State law requiring the payment of interest)
to the date of payment at a rate--
(A) At least equal to--
(1) The statutory rate of interest, if any, applicable to pecuniary
bequests under the law of the State whose law governs the
administration of the estate or trust; or
(2) If no such rate is indicated under applicable State law, 80
percent of the rate that is applicable under section 7520 at the death
of the transferor; and
(B) Not in excess of the greater of--
(1) The statutory rate of interest, if any, applicable to pecuniary
bequests under the law of the State whose law governs the
administration of the trust; or
(2) 120 percent of the rate that is applicable under section 7520
at the death of the transferor.
(ii) Pecuniary payments deemed to carry appropriate interest. For
purposes of this paragraph (b)(4), if a pecuniary payment does not
carry appropriate interest, the pecuniary payment is considered to
carry appropriate interest to the extent--
(A) The entire payment is made or property is irrevocably set aside
to satisfy the entire pecuniary payment within 15 months of the
transferor's death; or
(B) The governing instrument or applicable local law specifically
requires the executor or trustee to allocate to the pecuniary payment a
pro rata share of the income earned by the fund from which the
pecuniary payment is to be made between the date of death of the
transferor and the date of payment. For purposes of paragraph
(b)(4)(ii)(A) of this section, property is irrevocably set aside if it
is segregated and held in a separate account pending distribution.
(c) Examples. The following examples illustrate the provisions of
this section:
Example 1. T transfers $100,000 to a newly-created irrevocable
trust on December 15, 1996. The trust provides that income is to be
paid to T's child for 10 years. At the end of the 10-year period,
the trust principal is to be paid to T's grandchild. T does not
allocate any GST exemption to the trust on the gift tax return
reporting the transfer. On November 15, 1997, T files a Form 709
allocating $50,000 of GST exemption to the trust. Because the
allocation was made on a late filed return, the value of the
property transferred to the trust is determined on the date the
allocation is filed (unless an election is made pursuant to
paragraph (a)(2) of this section to value the trust property as of
the first day of the month in which the allocation document is filed
with the Internal Revenue Service). On November 15, 1997, the value
of the trust property is $150,000. Effective as of November 15,
1997, the applicable fraction with respect to the trust is .333
($50,000 (the
[[Page 66917]]
amount of GST exemption allocated to the trust) over $150,000 (the
value of the trust principal on the effective date of the GST
exemption allocation)), and the inclusion ratio is .667 (1.0-.333).
Example 2. The facts are the same as in Example 1, except the
value of the trust property is $80,000 on November 15, 1997. The
applicable fraction is .625 ($50,000 over $80,000) and the inclusion
ratio is .375 (1.0-.625).
Example 3. T transfers $100,000 to a newly-created irrevocable
trust on December 15, 1996. The trust provides that income is to be
paid to T's child for 10 years. At the end of the 10-year period,
the trust principal is to be paid to T's grandchild. T does not
allocate any GST exemption to the trust on the gift tax return
reporting the transfer. On November 15, 1997, T files a Form 709
allocating $50,000 of GST exemption to the trust. T elects to value
the trust principal on the first day of the month in which the
allocation is made pursuant to the election provided in paragraph
(a)(2) of this section. Because the late allocation is made in
November, the value of the trust is determined as of November 1,
1997.
Sec. 26.2642-3 Special rule for charitable lead annuity trusts.
(a) In general. In determining the applicable fraction with respect
to a charitable lead annuity trust--
(1) The numerator is the adjusted generation-skipping transfer tax
exemption (adjusted GST exemption); and
(2) The denominator is the value of all property in the trust
immediately after the termination of the charitable lead annuity.
(b) Adjusted GST exemption defined. The adjusted GST exemption is
the amount of GST exemption allocated to the trust increased by an
amount equal to the interest that would accrue if an amount equal to
the allocated GST exemption were invested at the rate used to determine
the amount of the estate or gift tax charitable deduction, compounded
annually, for the actual period of the charitable lead annuity. If a
late allocation is made to a charitable lead annuity trust, the
adjusted GST exemption is the amount of GST exemption allocated to the
trust increased by the interest that would accrue if invested at such
rate for the period beginning on the date of the late allocation and
extending for the balance of the actual period of the charitable lead
annuity. The amount of GST exemption allocated to a charitable lead
annuity trust is not reduced even though it is ultimately determined
that the allocation of a lesser amount of GST exemption would have
resulted in an inclusion ratio of zero. For purposes of chapter 13, a
charitable lead annuity trust is any trust providing an interest in the
form of a guaranteed annuity described in Sec. 25.2522(c)-3(c)(2)(vi)
of this chapter for which the transferor is allowed a charitable
deduction for Federal estate or gift tax purposes.
(c) Example. The following example illustrates the provisions of
this section:
Example. T creates a charitable lead annuity trust for a 10-year
term with the remainder payable to T's grandchild. T timely
allocates an amount of GST exemption to the trust which T expects
will ultimately result in a zero inclusion ratio. However, at the
end of the charitable lead interest, because the property has not
appreciated to the extent T anticipated, the numerator of the
applicable fraction is greater than the denominator. The inclusion
ratio for the trust is zero. No portion of the GST exemption
allocated to the trust is restored to T or to T's estate.
Sec. 26.2642-4 Redetermination of applicable fraction.
(a) In general. The applicable fraction for a trust is redetermined
whenever additional exemption is allocated to the trust or when certain
changes occur with respect to the principal of the trust. Except as
otherwise provided in this paragraph (a), the numerator of the
redetermined applicable fraction is the sum of the amount of GST
exemption currently being allocated to the trust (if any) plus the
value of the nontax portion of the trust, and the denominator of the
redetermined applicable fraction is the value of the trust principal
immediately after the event occurs. The nontax portion of a trust is
determined by multiplying the value of the trust assets, determined
immediately prior to the event, by the then applicable fraction.
(1) Multiple transfers to a single trust. If property is added to
an existing trust, the denominator of the redetermined applicable
fraction is the value of the trust immediately after the addition
reduced as provided in Sec. 26.2642-1(c).
(2) Consolidation of separate trusts. If separate trusts created by
one transferor are consolidated, a single applicable fraction for the
consolidated trust is determined. The numerator of the redetermined
applicable fraction is the sum of the nontax portions of each trust
immediately prior to the consolidation.
(3) Property included in transferor's gross estate. If the value of
property held in a trust created by the transferor, with respect to
which an allocation was made at a time that the trust was not subject
to an ETIP, is included in the transferor's gross estate, the
applicable fraction is redetermined if additional GST exemption is
allocated to the property. The numerator of the redetermined applicable
fraction is an amount equal to the nontax portion of the property
immediately after the death of the transferor increased by the amount
of GST exemption allocated by the executor of the transferor's estate
to the trust. If additional GST exemption is not allocated to the
trust, the applicable fraction immediately before death is not changed,
if the trust was not subject to an ETIP at the time GST exemption was
allocated to the trust. The denominator of the applicable fraction is
reduced to reflect any federal or state, estate or inheritance taxes
paid from the trust.
(4) Imposition of recapture tax under section 2032A--(i) If an
additional estate tax is imposed under section 2032A and if the section
2032A election was effective (under Sec. 26.2642-2(b)) for purposes of
the GST tax, the applicable fraction with respect to the property is
redetermined as of the date of death of the transferor. In making the
redetermination, any available GST exemption not allocated at the death
of the transferor (or at a prior recapture event) is automatically
allocated to the property. The denominator of the applicable fraction
is the fair market value of the property at the date of the
transferor's death reduced as provided in Sec. 26.2642-1(c) and further
reduced by the amount of the additional GST tax actually recovered from
the trust.
(ii) The GST tax imposed with respect to any taxable termination,
taxable distribution, or direct skip occurring prior to the recapture
event is recomputed based on the applicable fraction as redetermined.
Any additional GST tax as recomputed is due and payable on the date
that is six months after the event that causes the imposition of the
additional estate tax under section 2032A. The additional GST tax is
remitted with Form 706-A and is reported by attaching a statement to
Form 706-A showing the computation of the additional GST tax.
(iii) The applicable fraction, as redetermined under this section,
is also used in determining any GST tax imposed with respect to GSTs
occurring after the date of the recapture event.
(b) Examples. The following examples illustrate the principles of
this section:
Example 1. Allocation of additional exemption. T transfers
$200,000 to an irrevocable trust under which the income is payable
to T's child, C, for life. Upon the termination of the trust, the
remainder is payable to T's grandchild, GC. At a time when no ETIP
exists with respect to the trust property, T makes a timely
allocation of $100,000 of GST exemption, resulting in an inclusion
ratio of .50. Subsequently, when the entire trust property is valued
at $500,000, T allocates an additional $100,000 of T's unused GST
exemption to the trust. The inclusion ratio of the trust is
recomputed at that time. The numerator of the applicable fraction is
$350,000 ($250,000 (the nontax
[[Page 66918]]
portion as of the date of the allocation) plus $100,000 (the GST
exemption currently being allocated)). The denominator is $500,000
(the date of allocation fair market value of the trust). The
inclusion ratio is .30 (1 - .70).
Example 2. Multiple transfers to a trust, allocation both timely
and late. On December 10, 1993, T transfers $10,000 to an
irrevocable trust that does not satisfy the requirements of section
2642(c)(2). T makes identical transfers to the trust on December 10,
1994, 1995, 1996, and on January 15, 1997. Immediately after the
transfer on January 15, 1997, the value of the trust principal is
$40,000. On January 14, 1998, when the value of the trust principal
is $50,000, T allocates $30,000 of GST exemption to the trust. T
discloses the 1997 transfer on the Form 709 filed on January 14,
1998. Thus, T's allocation is a timely allocation with respect to
the transfer in 1997, $10,000 of the allocation is effective as of
the date of that transfer, and, on and after January 15, 1997, the
inclusion ratio of the trust is .75 (1 - ($10,000/$40,000)). The
balance of the allocation is a late allocation with respect to prior
transfers to the trust and is effective as of January 14, 1998. In
redetermining the inclusion ratio as of that date, the numerator of
the redetermined applicable fraction is $32,500 ($12,500 (.25 x
$50,000), the nontax portion of the trust on January 14, 1998) plus
$20,000 (the amount of GST exemption allocated late to the trust).
The denominator of the new applicable fraction is $50,000 (the value
of the trust principal at the time of the late allocation).
Example 3. Excess allocation. (i) T creates an irrevocable trust
for the benefit of T's child and grandchild in 1996 transferring
$50,000 to the trust on the date of creation. T allocates no GST
exemption to the trust on the Form 709 reporting the transfer. On
July 1, 1997 (when the value of the trust property is $60,000), T
transfers an additional $40,000 to the trust.
(ii) On April 15, 1998, when the value of the trust is $150,000,
T files a Form 709 reporting the 1997 transfer and allocating
$150,000 of GST exemption to the trust. The allocation is a timely
allocation of $40,000 with respect to the 1997 transfer and is
effective as of that date. Thus, the applicable fraction for the
trust as of July 1, 1997 is .40 ($40,000/$100,000 ($40,000 +
$60,000)).
(iii) The allocation is also a late allocation of $90,000, the
amount necessary to attain a zero inclusion ratio on April 15, 1998,
computed as follows: $60,000 (the nontax portion immediately prior
to the allocation (.40 x $150,000)) plus $90,000 (the additional
allocation necessary to produce a zero inclusion ratio based on a
denominator of $150,000)/$150,000 equals one and, thus, an inclusion
ratio of zero. The balance of the allocation, $20,000 ($150,000 less
the timely allocation of $40,000 less the late allocation of
$90,000) is void.
Example 4. Undisclosed transfer. (i) The facts are the same as
in Example 3, except that on February 1, 1998 (when the value of the
trust is $150,000), T transfers an additional $50,000 to the trust
and the value of the entire trust corpus on April 15, 1998 is
$220,000. The Form 709 filed on April 15, 1998 does not disclose the
1998 transfer. Under the rule in Sec. 26.2632-1(b)(2)(ii), the
allocation is effective first as a timely allocation to the 1997
transfer; second, as a late allocation to the trust as of April 15,
1998; and, finally as a timely allocation to the February 1, 1998
transfer. As of April 15, 1998, $55,000, a pro rata portion of the
trust assets, is considered to be the property transferred to the
trust on February 1, 1998 (($50,000/$200,000) x $220,000). The
balance of the trust, $165,000, represents prior transfers to the
trust.
(ii) As in Example 3, the allocation is a timely allocation as
to the 1997 transfer (and the applicable fraction as of July 1, 1997
is .40) and a late allocation as of 1998. The amount of the late
allocation is $99,000, computed as follows: (.40 x $165,000 plus
$99,000)/$165,000 = one.
(iii) The balance of the allocation, $11,000 ($150,000 less the
timely allocation of $40,000 less the late allocation of $99,000) is
a timely allocation as of February 1, 1998. The applicable fraction
with respect to the trust, as of February 1, 1998, is .355, computed
as follows: $60,000 (the nontax portion of the trust immediately
prior to the February 1, 1998 transfer (.40 x $150,000)) plus
$11,000 (the amount of the timely allocation to the 1998 transfer)/
$200,000 (the value of the trust on February 1, 1998, after the
transfer on that date) = $71,000/$200,000 = .355.
(iv) The applicable fraction with respect to the trust, as of
April 15, 1998, is .805 computed as follows: $78,100 (the nontax
portion immediately prior to the allocation (.355 x $220,000))
plus $99,000 (the amount of the late allocation)/ $220,000 =
$177,100/$220,000 = .805.
Example 5. Redetermination of inclusion ratio on ETIP
termination. (i) T transfers $100,000 to an irrevocable trust. The
trust instrument provides that trust income is to be paid to T for 9
years or until T's prior death. The trust principal is to be paid to
T's grandchild, GC, on the termination of T's income interest. The
trustee has the power to invade trust principal for the benefit of
GC during the term of T's income interest. The trust is subject to
an ETIP while T holds the retained income interest. T files a timely
Form 709 reporting the transfer and allocates $100,000 of GST
exemption to the trust. In year 4, when the value of the trust is
$200,000, the trustee distributes $15,000 to GC. The distribution is
a taxable distribution. Because of the existence of the ETIP, the
inclusion ratio with respect to the taxable distribution is
determined immediately prior to the occurrence of the GST. Thus, the
inclusion ratio applicable to the year 4 GST is .50 (1 - ($100,000/
$200,000 = .50).
(ii) In year 5, when the value of the trust is again $200,000,
the trustee distributes another $15,000 to GC. Because the trust is
still subject to the ETIP in year 5, the inclusion ratio with
respect to the year 5 GST is again computed immediately prior to the
GST. In computing the new inclusion ratio, the numerator of the
applicable fraction is reduced by the nontax portion of prior GSTs
occurring during the ETIP. Thus, the numerator of the applicable
fraction with respect to the GST in year 5 is $92,500 ($100,000 -
(.50 x $15,000)) and the inclusion ratio applicable with respect
to the GST in year 5 is .537 (1 - ($92,500/$200,000) = .463). Any
additional GST exemption allocated on a timely ETIP return with
respect to the GST in year 5 is effective immediately prior to the
transfer.
Sec. 26.2642-5 Finality of inclusion ratio.
(a) Direct skips. The inclusion ratio applicable to a direct skip
becomes final when no additional GST tax (including additional GST tax
payable as a result of a cessation, etc. of qualified use under section
2032A(c)) may be assessed with respect to the direct skip.
(b) Other GSTs. With respect to taxable distributions and taxable
terminations, the inclusion ratio for a trust becomes final, on the
later of--
(1) The expiration of the period for assessment with respect to the
first GST tax return filed using that inclusion ratio; (unless the
trust is subject to an election under section 2032A in which case the
applicable date under this subsection is the expiration of the period
of assessment of any additional GST tax due as a result of a cessation,
etc. of qualified use under section 2032A); or
(2) The expiration of the period for assessment of Federal estate
tax with respect to the estate of the transferor. For purposes of this
paragraph (b)(2), if an estate tax return is not required to be filed,
the period for assessment is determined as if a return were required to
be filed and as if the return were timely filed within the period
prescribed by section 6075(a).
Sec. 26.2652-1 Transferor defined; other definitions.
(a) Transferor defined--(1) In general. Except as otherwise
provided in paragraph (a)(3) of this section, the individual with
respect to whom property was most recently subject to Federal estate or
gift tax is the transferor of that property for purposes of chapter 13.
An individual is treated as transferring any property with respect to
which the individual is the transferor. Thus, an individual may be a
transferor even though there is no transfer of property under local law
at the time the Federal estate or gift tax applies. For purposes of
this paragraph, a surviving spouse is the transferor of a qualified
domestic trust created by the deceased spouse that is included in the
surviving spouse's gross estate, provided the trust is not subject to
the election described in Sec. 26.2652-2 (reverse QTIP election). A
surviving spouse is also the transferor of a qualified domestic trust
created by the surviving spouse pursuant to section 2056(d)(2)(B).
(2) Transfers subject to Federal estate or gift tax. For purposes
of this section,
[[Page 66919]]
a transfer is subject to Federal gift tax if a gift tax is imposed
under section 2501(a). A transfer is subject to Federal estate tax if
the value of the property is includible in the decedent's gross estate
as determined under section 2031 or section 2103.
(3) Special rule for certain QTIP trusts. Solely for purposes of
chapter 13, if a transferor of qualified terminable interest property
(QTIP) elects under Sec. 26.2652-2(a) to treat the property as if the
QTIP election had not been made (reverse QTIP election), the identity
of the transferor of the property is determined without regard to the
application of sections 2044, 2207A, and 2519.
(4) Exercise of certain nongeneral powers of appointment. The
exercise of a power of appointment that is not a general power of
appointment (as defined in section 2041(b)) is treated as a transfer
subject to Federal estate or gift tax by the holder of the power if the
power is exercised in a manner that may postpone or suspend the
vesting, absolute ownership, or power of alienation of an interest in
property for a period, measured from the date of creation of the trust,
extending beyond any specified life in being at the date of creation of
the trust plus a period of 21 years plus, if necessary, a reasonable
period of gestation (perpetuities period). For purposes of this
paragraph (a)(4), the exercise of a power of appointment that validly
postpones or suspends the vesting, absolute ownership, or power of
alienation of an interest in property for a term of years that will not
exceed 90 years (measured from the date of creation of the trust) is
not an exercise that may extend beyond the perpetuities period.
(5) Split-gift transfers. In the case of a transfer with respect to
which the donor's spouse makes an election under section 2513 to treat
the gift as made one-half by the spouse, the electing spouse is treated
as the transferor of one-half of the entire value of the property
transferred by the donor, regardless of the interest the electing
spouse is actually deemed to have transferred under section 2513. The
donor is treated as the transferor of one-half of the value of the
entire property. See Sec. 26.2632-1(c)(5) Example 3, regarding
allocation of GST exemption with respect to split-gift transfers
subject to an ETIP.
(6) Examples. The following examples illustrate the principles of
this paragraph (a):
Example 1. Identity of transferor. T transfers $100,000 to a
trust for the sole benefit of T's grandchild. The transfer is a
completed gift under Sec. 25.2511-2 of this chapter. Thus, for
purposes of chapter 13, T is the transferor of the $100,000. It is
immaterial that a portion of the transfer is excluded from the total
amount of T's taxable gift by reason of section 2503(b).
Example 2. Gift splitting and identity of transferor. The facts
are the same as in Example 1, except T's spouse, S, consents under
section 2513 to split the gift with T. For purposes of chapter 13, S
and T are each treated as a transferor of $50,000 to the trust.
Example 3. Change of transferor on subsequent transfer tax
event. T transfers $100,000 to a trust providing that all the net
trust income is to be paid to T's spouse, S, for S's lifetime. T
elects under section 2523(f) to treat the transfer as a transfer of
qualified terminable interest property, and T does not make the
reverse QTIP election under section 2652(a)(3). On S's death, the
trust property is included in S's gross estate under section 2044.
Thus, S becomes the transferor at the time of S's death.
Example 4. Effect of transfer of an interest in trust on
identity of the transferor. T transfers $100,000 to a trust
providing that all of the net income is to be paid to T's child, C,
for C's lifetime. At C's death, the trust property is to be paid to
T's grandchild. C transfers the income interest to X, an unrelated
party, in a transfer that is a completed transfer for Federal gift
tax purposes. Because C's transfer is a transfer of a term interest
in the trust that does not affect the rights of other parties with
respect to the trust property, T remains the transferor with respect
to the trust.
Example 5. Effect of lapse of withdrawal right on identity of
transferor. T transfers $10,000 to a new trust providing that the
trust income is to be paid to T's child, C, for C's life and, on the
death of C, the trust principal is to be paid to T's grandchild, GC.
The trustee has discretion to distribute principal for GC's benefit
during C's lifetime. C has a right to withdraw $10,000 from the
trust for a 60-day period following the transfer. Thereafter, the
power lapses. C does not exercise the withdrawal right. The transfer
by T is a completed transfer within the meaning of Sec. 25.2511-2 of
this chapter and, thus, T is treated as having transferred the
entire $10,000 to the trust. On the lapse of the withdrawal right, C
becomes a transferor to the extent C is treated as having made a
completed transfer for purposes of chapter 12. Therefore, except to
the extent that the amount with respect to which the power of
withdrawal lapses exceeds the greater of $5,000 or 5% of the value
of the trust property, T remains the transferor of the trust
property for purposes of chapter 13.
Example 6. Effect of reverse QTIP election on identity of the
transferor. T establishes a testamentary trust having a principal of
$500,000. Under the terms of the trust, all trust income is payable
to T's surviving spouse, S, during S's lifetime. T's executor makes
an election to treat the trust property as qualified terminable
interest property and also makes the reverse QTIP election. For
purposes of chapter 13, T is the transferor with respect to the
trust. On S's death, the then full fair market value of the trust is
includible in S's gross estate under section 2044. However, because
of the reverse QTIP election, S does not become the transferor with
respect to the trust; T continues to be the transferor.
Example 7. Effect of reverse QTIP election on constructive
additions. The facts are the same as in Example 6, except the
inclusion of the QTIP trust in S's gross estate increased the
Federal estate tax liability of S's estate by $200,000. The estate
does not exercise the right of recovery from the trust granted under
section 2207A. Under local law, the beneficiaries of S's residuary
estate (which bears all estate taxes under the will) could compel
the executor to exercise the right of recovery but do not do so.
Solely for purposes of chapter 13, the beneficiaries of the
residuary estate are not treated as having made an addition to the
trust by reason of their failure to exercise their right of
recovery. Because of the reverse QTIP election, for GST purposes,
the trust property is not treated as includible in S's gross estate
and, under those circumstances, no right of recovery exists.
Example 8. Effect of reverse QTIP election on constructive
additions. S, the surviving spouse of T, dies testate. At the time
of S's death, S was the beneficiary of a trust with respect to which
T's executor made a QTIP election under section 2056(b)(7). Thus,
the trust is includible in S's gross estate under section 2044. T's
executor also made the reverse QTIP election with respect to the
trust. S's will provides that all death taxes payable with respect
to the trust are payable from S's residuary estate. Since the
transferor of the property is determined without regard to section
2044 and section 2207A, S is not treated as making a constructive
addition to the trust by reason of the tax apportionment clause in
S's will.
Example 9. Exercise of a nongeneral power of appointment. On May
15, 1990, T established an irrevocable trust under which the trust
income is to be paid to T's child, C, for life. C is given a
testamentary power to appoint the remainder in further trust for the
benefit of C's issue. In default of C's exercise of the power, the
remainder is to pass to charity. C dies on February 3, 1997,
survived by two children and a sibling, S (who was born prior to May
15, 1990). C exercises the power in a manner that validly extends
the trust in favor of C's issue until the later of May 15, 2070 (80
years from the date the trust was created), or the death of S. C's
exercise of the power is considered a transfer by C that is subject
to the estate or gift tax because it may extend the term of the
trust beyond the perpetuities period.
Example 10. Exercise of a nongeneral power of appointment. The
facts are the same as in Example 9, except local law provides that
the effect of C's exercise is to extend the term of the trust until
May 15, 2070, whether or not S survives that date. C is not treated
as having made a transfer to the trust as a result of the exercise
of the power because the exercise of the power does not extend the
term of the trust beyond a period of 90 years measured from the
creation of the trust. The result would be the same if the effect of
C's exercise is either to extend the term of the trust until the
death of S or to extend the term of the trust until the first to
occur of May 15, 2070, or the death of S.
[[Page 66920]]
Example 11. Split-gift transfers. T transfers $100,000 to an
inter vivos trust that provides T with an annuity payable for ten
years or until T's prior death. The annuity satisfies the definition
of a qualified interest under section 2702(b). When the trust
terminates, the corpus is to be paid to T's grandchild, GC. T's
spouse, S, consents under section 2513 to have the gift treated as
made one-half by S. Under section 2513, only the actuarial value of
the gift to GC is eligible to be treated as made one-half by S.
However, because S is treated as the donor of one-half of the gift
to GC, S becomes the transferor of one-half of the entire trust
($50,000) for purposes of Chapter 13.
(b) Trust defined--(1) In general. A trust includes any arrangement
(other than an estate) that has substantially the same effect as a
trust. Thus, for example, arrangements involving life estates and
remainders, estates for years, and insurance and annuity contracts are
trusts. Generally, a transfer as to which the identity of the
transferee is contingent upon the occurrence of an event is a transfer
in trust; however, a transfer of property included in the transferor's
gross estate, as to which the identity of the transferee is contingent
upon an event that must occur within 6 months of the transferor's
death, is not considered a transfer in trust solely by reason of the
existence of the contingency.
(2) Examples. The following examples illustrate the provisions of
this paragraph (b):
Example 1. Uniform gifts to minors transfers. T transfers cash
to an account in the name of T's child, C, as custodian for C's
child, GC (who is a minor), under a state statute substantially
similar to the Uniform Gifts to Minors Act. For purposes of chapter
13, the transfer to the custodial account is treated as a transfer
to a trust.
Example 2. Contingent transfers. T bequeaths $200,000 to T's
child, C, provided that if C does not survive T by more than 6
months, the bequest is payable to T's grandchild, GC. C dies 4
months after T. The bequest is not a transfer in trust because the
contingency that determines the recipient of the bequest must occur
within 6 months of T's death. The bequest to GC is a direct skip.
Example 3. Contingent transfers. The facts are the same as in
Example 2, except C must survive T by 18 months to take the bequest.
The bequest is a transfer in trust for purposes of chapter 13, and
the death of C is a taxable termination.
(c) Trustee defined. The trustee of a trust is the person
designated as trustee under local law or, if no such person is so
designated, the person in actual or constructive possession of property
held in trust.
(d) Executor defined. For purposes of chapter 13, the executor is
the executor or administrator of the decedent's estate. However, if no
executor or administrator is appointed, qualified or acting within the
United States, the executor is the fiduciary who is primarily
responsible for payment of the decedent's debts and expenses. If there
is no such executor, administrator or fiduciary, the executor is the
person in actual or constructive possession of the largest portion of
the value of the decedent's gross estate.
(e) Interest in trust. See Sec. 26.2612-1(e) for the definition of
interest in trust.
Sec. 26.2652-2 Special election for qualified terminable interest
property.
(a) In general. If an election is made to treat property as
qualified terminable interest property (QTIP) under section 2523(f) or
section 2056(b)(7), the person making the election may, for purposes of
chapter 13, elect to treat the property as if the QTIP election had not
been made (reverse QTIP election). An election under this section is
irrevocable. An election under this section is not effective unless it
is made with respect to all of the property in the trust to which the
QTIP election applies. See, however, Sec. 26.2654-1(b)(1). Property
that qualifies for a deduction under section 2056(b)(5) is not eligible
for the election under this section.
(b) Time and manner of making election. An election under this
section is made on the return on which the QTIP election is made. If a
protective QTIP election is made, no election under this section is
effective unless a protective reverse QTIP election is also made.
(c) Transitional rule. If a reverse QTIP election is made with
respect to a trust prior to December 27, 1995, and GST exemption has
been allocated to that trust, the transferor (or the transferor's
executor) may elect to treat the trust as two separate trusts, one of
which has a zero inclusion ratio by reason of the transferor's GST
exemption previously allocated to the trust. The separate trust with
the zero inclusion ratio consists of that fractional share of the value
of the entire trust equal to the value of the nontax portion of the
trust under Sec. 26.2642-4(a). The reverse QTIP election is treated as
applying only to the trust with the zero inclusion ratio. An election
under this paragraph (c) is made by attaching a statement to a copy of
the return on which the reverse QTIP election was made under section
2652(a)(3). The statement must indicate that an election is being made
to treat the trust as two separate trusts and must identify the values
of the two separate trusts. The statement is to be filed in the same
place in which the original return was filed and must be filed before
June 24, 1996. A trust subject to the election described in this
paragraph is treated as a trust that was created by two transferors.
See Sec. 26.2654-1(a)(2) for special rules involving trusts with
multiple transferors.
(d) Examples. The following examples illustrate the provisions of
this section:
Example 1. Special (reverse QTIP) election under section
2652(a)(3). T transfers $1,000,000 to a trust providing that all
trust income is to be paid to T's spouse, S, for S's lifetime. On
S's death, the trust principal is payable to GC, a grandchild of S
and T. T elects to treat all of the transfer as a transfer of QTIP
and also makes the reverse QTIP election for all of the property.
Because of the reverse QTIP election, T continues to be treated as
the transferor of the property after S's death for purposes of
chapter 13. A taxable termination rather than a direct skip occurs
on S's death.
Example 2. Election under transition rule. In 1994, T died
leaving $4 million in trust for the benefit of T's surviving spouse,
S. On January 16, 1995, T's executor filed T's Form 706 on which the
executor elects to treat the entire trust as qualified terminable
interest property. The executor also makes a reverse QTIP election.
The reverse QTIP election is effective with respect to the entire
trust even though T's executor could allocate only $1 million of GST
exemption to the trust. T's executor may elect to treat the trust as
two separate trusts, one having a value of 25% of the value of the
single trust and an inclusion ratio of zero, but only if the
election is made prior to June 24, 1996. If the executor makes the
transitional election, the other separate trust, having a value of
75% of the value of the single trust and an inclusion ratio of one,
is not treated as subject to the reverse QTIP election.
Example 3. Denominator of the applicable fraction of QTIP trust.
T bequeaths $1,500,000 to a trust in which T's surviving spouse, S,
receives an income interest for life. Upon the death of S, the
property is to remain in trust for the benefit of C, the child of T
and S. Upon C's death, the trust is to terminate and the trust
property paid to the descendants of C. The bequest qualifies for the
estate tax marital deduction under section 2056(b)(7) as QTIP. The
executor does not make the reverse QTIP election under section
2652(a)(3). As a result, S becomes the transferor of the trust at
S's death when the value of the property in the QTIP trust is
included in S's gross estate under section 2044. For purposes of
computing the applicable fraction with respect to the QTIP trust
upon S's death, the denominator of the fraction is reduced by any
Federal estate tax (whether imposed under section 2001, 2101 or
2056A(b)) and State death tax attributable to the trust property
that is actually recovered from the trust.
Sec. 26.2653-1 Taxation of multiple skips.
(a) General rule. If property is held in trust immediately after a
GST, solely for purposes of determining whether future events involve a
skip person, the transferor is thereafter deemed to occupy the
generation immediately
[[Page 66921]]
above the highest generation of any person holding an interest in the
trust immediately after the transfer. If no person holds an interest in
the trust immediately after the GST, the transferor is treated as
occupying the generation above the highest generation of any person in
existence at the time of the GST who then occupies the highest
generation level of any person who may subsequently hold an interest in
the trust. See Sec. 26.2612-1(e) for rules determining when a person
has an interest in property held in trust.
(b) Examples. The following examples illustrate the provisions of
this section:
Example 1. T transfers property to an irrevocable trust for the
benefit of T's grandchild, GC, and great-grandchild, GGC. During
GC's life, the trust income may be distributed to GC and GGC in the
trustee's absolute discretion. At GC's death, the trust property
passes to GGC. Both GC and GGC have an interest in the trust for
purposes of chapter 13. The transfer by T to the trust is a direct
skip, and the property is held in trust immediately after the
transfer. After the direct skip, the transferor is treated as being
one generation above GC, the highest generation individual having an
interest in the trust. Therefore, GC is no longer a skip person and
distributions to GC are not taxable distributions. However, because
GGC occupies a generation that is two generations below the deemed
generation of T, GGC is a skip person and distributions of trust
income to GGC are taxable distributions.
Example 2. T transfers property to an irrevocable trust
providing that the income is to be paid to T's child, C, for life.
At C's death, the trust income is to be accumulated for 10 years and
added to principal. At the end of the 10-year accumulation period,
the trust income is to be paid to T's grandchild, GC, for life. Upon
GC's death, the trust property is to be paid to T's great-
grandchild, GGC, or to GGC's estate. A GST occurs at C's death.
Immediately after C's death and during the 10-year accumulation
period, no person has an interest in the trust within the meaning of
section 2652(c) and Sec. 26.2612-1(e) because no one can receive
current distributions of income or principal. Immediately after C's
death, T is treated as occupying the generation above the generation
of GC (the trust beneficiary in existence at the time of the GST who
then occupies the highest generation level of any person who may
subsequently hold an interest in the trust). Thus, subsequent income
distributions to GC are not taxable distributions.
Sec. 26.2654-1 Certain trusts treated as separate trusts.
(a) Single trust treated as separate trusts--(1) Substantially
separate and independent shares--(i) In general. If a single trust
consists solely of substantially separate and independent shares for
different beneficiaries, the share attributable to each beneficiary (or
group of beneficiaries) is treated as a separate trust for purposes of
chapter 13. The phrase ``substantially separate and independent
shares'' generally has the same meaning as provided in Sec. 1.663(c)-3
of this chapter. However, a portion of a trust is not a separate share
unless such share exists from and at all times after the creation of
the trust. For purposes of this paragraph (a)(1), a trust is treated as
created at the date of death of the grantor if the trust is includible
in its entirety in the grantor's gross estate for Federal estate tax
purposes. Further, treatment of a single trust as separate trusts under
this paragraph (a)(1) does not permit treatment of those portions as
separate trusts for purposes of filing returns and payment of tax or
for purposes of computing any other tax imposed under the Internal
Revenue Code. Also, additions to, and distributions from, such trusts
are allocated pro rata among the separate trusts, unless the governing
instrument expressly provides otherwise.
(ii) Certain pecuniary amounts. For purposes of this section, if a
person holds the current right to receive a mandatory (i.e.,
nondiscretionary and noncontingent) payment of a pecuniary amount at
the death of the transferor from an inter vivos trust that is
includible in the transferor's gross estate, or a testamentary trust,
the pecuniary amount is a separate and independent share if--
(A) The trustee is required to pay appropriate interest (as defined
in Sec. 26.2642-2(b)(4)(i) and (ii)) to the person; or
(B) If the pecuniary amount is payable in kind on the basis of
value other than the date of distribution value of the assets, the
trustee is required to allocate assets to the pecuniary payment in a
manner that fairly reflects net appreciation or depreciation in the
value of the assets in the fund available to pay the pecuniary amount
measured from the date of death to the date of payment.
(2) Multiple transferors with respect to single trust--(i) In
general. If there is more than one transferor with respect to a trust,
the portions of the trust attributable to the different transferors are
treated as separate trusts for purposes of chapter 13. Treatment of a
single trust as separate trusts under this paragraph (a)(2) does not
permit treatment of those portions as separate trusts for purposes of
filing returns and payment of tax or for purposes of computing any
other tax imposed under the Internal Revenue Code. Also, additions to,
and distributions from, such trusts are allocated pro rata among the
separate trusts unless otherwise expressly provided in the governing
instrument.
(ii) Addition by a transferor. If an individual makes an addition
to a trust of which the individual is not the sole transferor, the
portion of the single trust attributable to each separate trust is
determined by multiplying the fair market value of the single trust
immediately after the contribution by a fraction. The numerator of the
fraction is the value of the separate trust immediately after the
contribution. The denominator of the fraction is the fair market value
of all the property in the single trust immediately after the transfer.
(3) Severance of a single trust. A single trust treated as separate
trusts under paragraphs (a)(1) or (2) of this section may be divided at
any time into separate trusts to reflect that treatment. For this
purpose, the rules of paragraph (b)(1)(ii)(C) of this section apply
with respect to the severance and funding of the severed trusts.
(4) Allocation of exemption--(i) In general. With respect to a
separate share treated as a separate trust under paragraph (a)(1) or
(2) of this section, an individual's GST exemption is allocated to the
separate trust. See Sec. 26.2632-1 for rules concerning the allocation
of GST exemption.
(ii) Automatic allocation to direct skips. If the transfer is a
direct skip to a trust that occurs during the transferor's lifetime and
is treated as a transfer to separate trusts under paragraphs (a)(1) or
(a)(2) of this section, the transferor's GST exemption not previously
allocated is automatically allocated on a pro rata basis among the
separate trusts. The transferor may prevent an automatic allocation of
GST exemption to a separate share of a single trust by describing on a
timely-filed United States Gift (and Generation-Skipping Transfer) Tax
Return (Form 709) the transfer and the extent to which the automatic
allocation is not to apply to a particular share. See Sec. 26.2632-1(b)
for rules for avoiding the automatic allocation of GST exemption.
(5) Examples. The following examples illustrate the principles of
this section (a):
Example 1. Separate shares as separate trusts. T transfers
$100,000 to a trust under which income is to be paid in equal shares
for 10 years to T's child, C, and T's grandchild, GC (or their
respective estates). The trust does not permit distributions of
principal during the term of the trust. At the end of the 10-year
term, the trust principal is to be distributed to C and GC in equal
shares. The shares of C and GC in the trust are separate and
independent and, therefore, are treated as separate trusts. The
result
[[Page 66922]]
would not be the same if the trust permitted distributions of principal
unless the distributions could only be made from a one-half separate
share of the initial trust principal and the distributee's future
rights with respect to the trust are correspondingly reduced. T may
allocate part of T's GST exemption under section 2632(a) to the
share held for the benefit of GC.
Example 2. Separate share rule inapplicable. The facts are the
same as in Example 1, except the trustee holds the discretionary
power to distribute the income in any proportion between C and GC
during the last year of the trust. The shares of C and GC in the
trust are not separate and independent shares throughout the entire
term of the trust and, therefore, are not treated as separate trusts
for purposes of chapter 13.
Example 3. Pecuniary payment as separate share. T creates a
lifetime revocable trust providing that on T's death $500,000 is
payable to T's spouse, S, with the balance of the principal to be
held for the benefit of T's grandchildren. The value of the trust is
includible in T's gross estate upon T's death. Under the terms of
the trust, the payment to S is required to be made in cash, and
under local law S is entitled to receive interest on the payment at
an annual rate of 6 percent, commencing immediately upon T's death.
For purposes of chapter 13, the trust is treated as created at T's
death, and the $500,000 payable to S from the trust is treated as a
separate share. The result would be the same if the payment to S
could be satisfied using noncash assets at their value on the date
of distribution. Further, the result would be the same if the
decedent's probate estate poured over to the revocable trust on the
decedent's death and was then distributed in accordance with the
terms of the trust.
Example 4. Pecuniary payment not treated as separate share. The
facts are the same as in Example 3, except the bequest to S is to be
paid in noncash assets valued at their values as finally determined
for Federal estate tax purposes. Neither the trust instrument nor
local law requires that the assets distributed in satisfaction of
the bequest fairly reflect net appreciation or depreciation in all
the assets from which the bequest may be funded. S's $500,000
bequest is not treated as a separate share and the trust is treated
as a single trust for purposes of chapter 13.
Example 5. Multiple transferors to single trust. A transfers
$100,000 to an irrevocable generation-skipping trust; B
simultaneously transfers $50,000 to the same trust. As of the time
of the transfers, the single trust is treated as two trusts for
purposes of chapter 13. Because A contributed \2/3\ of the value of
the initial corpus, \2/3\ of the single trust principal is treated
as a separate trust created by A. Similarly, because B contributed
\1/3\ of the value of the initial corpus, \1/3\ of the single trust
is treated as a separate trust created by B. A or B may allocate
their GST exemption under section 2632(a) to the respective separate
trusts.
Example 6. Additional contributions. A transfers $100,000 to an
irrevocable generation-skipping trust; B simultaneously transfers
$50,000 to the same trust. When the value of the single trust has
increased to $180,000, A contributes an additional $60,000 to the
trust. At the time of the additional contribution, the portion of
the single trust attributable to each grantor's separate trust must
be redetermined. The portion of the single trust attributable to A's
separate trust immediately after the contribution is \3/4\ ((2/3 x
$180,000) + $60,000)/$240,000). The portion attributable to B's
separate trust after A's addition is \1/4\.
Example 7. Distributions from a separate share. The facts are
the same as in Example 6, except that, after A's second
contribution, $50,000 is distributed to a beneficiary of the trust.
Absent a provision in the trust instrument that charges the
distribution against the contribution of either A or B, \3/4\ of the
distribution is treated as made from the separate trust of which A
is the transferor and 1/4 from the separate trust of which B is the
transferor.
Example 8. Separate share rule inapplicable. T creates an
irrevocable trust that provides the trustee with the discretionary
power to distribute income or corpus to T's children and
grandchildren. The trust provides that, when T's youngest child
reaches age 21, the trust will be divided into separate shares, one
share for each child of T. The income from a respective child's
share will be paid to the child during the child's life with the
remainder passing to such child's children (grandchildren of T). The
separate shares that come into existence when the youngest child
reaches age 21 will not be recognized as separate trusts for
purposes of Chapter 13 because the shares did not exist from and at
all times after the creation of the trust. Any allocation of GST
exemption to the trust either before or after T's youngest child
reaches age 21 will apply with respect to the entire trust. Thus,
the inclusion ratio will be the same with respect to any
distribution from the trust or the separate shares. The result would
be the same if, the trust instrument provided that the trust was to
be divided into separate trusts when T's youngest child reached age
21.
(b) Division of a trust included in the gross estate--(1) In
general. The severance of a trust that is included in the transferor's
gross estate (or created under the transferor's will) into two or more
trusts is recognized for purposes of chapter 13 if--
(i) The trust is severed pursuant to a direction in the governing
instrument providing that the trust is to be divided upon the death of
the transferor; or
(ii) The governing instrument does not require or otherwise direct
severance but the trust is severed pursuant to discretionary authority
granted either under the governing instrument or under local law; and
(A) The terms of each of the new trusts provide for the same
succession of interests and beneficiaries as are provided in the
original trust;
(B) The severance occurs (or a reformation proceeding, if required,
is commenced) prior to the date prescribed for filing the Federal
estate tax return (including extensions actually granted) for the
estate of the transferor; and
(C) Either--
(1) The new trusts are severed on a fractional basis. If severed on
a fractional basis, the separate trusts need not be funded with a pro
rata portion of each asset held by the undivided trust. The trusts may
be funded on a nonpro rata basis provided funding is based on either
the fair market value of the assets on the date of funding or in a
manner that fairly reflects the net appreciation or depreciation in the
value of the assets measured from the date of death to the date of
funding; or
(2) If the severance is required (by the terms of the governing
instrument) to be made on the basis of a pecuniary amount, the
pecuniary payment is satisfied in a manner that would meet the
requirements of paragraph (a)(1)(ii) of this section if it were paid to
an individual.
(2) Special rule. If a court order severing the trust has not been
issued at the time the Federal estate tax return is filed, the executor
must indicate on a statement attached to the return that a proceeding
has been commenced to sever the trust and describe the manner in which
the trust is proposed to be severed. A copy of the petition or other
instrument used to commence the proceeding must also be attached to the
return. If the governing instrument of a trust or local law authorizes
the severance of the trust, a severance pursuant to that authorization
is treated as meeting the requirement of paragraph (b)(1)(ii)(B) of
this section if the executor indicates on the Federal estate tax return
that separate trusts will be created (or funded) and clearly sets forth
the manner in which the trust is to be severed and the separate trusts
funded.
(3) Allocation of exemption. An individual's GST exemption under
Sec. 2632 may be allocated to the separate trusts created pursuant to
this section at the discretion of the executor or trustee.
(4) Examples. The following examples illustrate the provisions of
this section (b):
Example 1. Severance of single trust. T's will establishes a
testamentary trust providing that income is to be paid to T's spouse
for life. At the spouse's death, one-half of the corpus is to be
paid to T's child, C, or C's estate (if C fails to survive the
spouse) and one-half of the corpus is to be paid to T's grandchild,
GC, or GC's estate (if GC fails to survive the spouse). If the
requirements of paragraph (b) of this section are otherwise
satisfied, T's executor may divide the testamentary trust equally
into two separate trusts, one trust providing an income interest to
spouse for life with
[[Page 66923]]
remainder to C, and the other trust with an income interest to spouse
for life with remainder to GC. Furthermore, if the requirements of
paragraph (b) of this section are satisfied, the executor or trustee
may further divide the trust for the benefit of GC. GST exemption
may be allocated to any of the divided trusts.
Example 2. Severance of revocable trust. T creates an inter
vivos revocable trust providing that, at T's death and after payment
of all taxes and administration expenses, the remaining corpus will
be divided into two trusts. One trust, for the benefit of T's
spouse, is to be funded with the smallest amount that, if qualifying
for the marital deduction, will reduce the estate tax to zero. The
other trust, for the benefit of T's descendants, is to be funded
with the balance of the revocable trust corpus. The trust corpus is
includible in T's gross estate. Each trust is recognized as a
separate trust for purposes of chapter 13.
26.2662-1 Generation-skipping transfer tax return requirements.
(a) In general. Chapter 13 imposes a tax on generation-skipping
transfers (as defined in section 2611). The requirements relating to
the return of tax depend on the type of generation-skipping transfer
involved. This section contains rules for filing the required tax
return. Paragraph (c)(2) of this section provides special rules
concerning the return requirements for generation-skipping transfers
pursuant to certain trust arrangements (as defined in paragraph
(c)(2)(ii) of this section), such as life insurance policies and
annuities.
(b) Form of return--(1) Taxable distributions. Form 706GS(D) must
be filed in accordance with its instructions for any taxable
distribution (as defined in section 2612(b)). The trust involved in a
transfer described in the preceding sentence must file Form 706GS(D-1)
in accordance with its instructions. A copy of Form 706GS(D-1) shall be
sent to each distributee.
(2) Taxable terminations. Form 706GS(T) must be filed in accordance
with its instructions for any taxable termination (as defined in
section 2612(a)).
(3) Direct skip--(i) Inter vivos direct skips. Form 709 must be
filed in accordance with its instructions for any direct skip (as
defined in section 2612(c)) that is subject to chapter 12 and occurs
during the life of the transferor.
(ii) Direct skips occurring at death--(A) In general. Form 706 or
Form 706NA must be filed in accordance with its instructions for any
direct skips (as defined in section 2612(c)) that are subject to
chapter 11 and occur at the death of the decedent.
(B) Direct skips payable from a trust. Schedule R-1 of Form 706
must be filed in accordance with its instructions for any direct skip
from a trust if such direct skip is subject to chapter 11. See
paragraph (c)(2) of this section for special rules relating to the
person liable for tax and required to make the return under certain
circumstances.
(c) Person liable for tax and required to make return--(1) In
general. Except as otherwise provided in this section, the following
person is liable for the tax imposed by section 2601 and must make the
required tax return--
(i) The transferee in a taxable distribution (as defined in section
2612(b));
(ii) The trustee in the case of a taxable termination (as defined
in section 2612(a));
(iii) The transferor (as defined in section 2652(a)(1)(B)) in the
case of an inter vivos direct skip (as defined in section 2612(c));
(iv) The trustee in the case of a direct skip from a trust or with
respect to property that continues to be held in trust; or
(v) The executor in the case of a direct skip (other than a direct
skip described in paragraph (c)(1)(iv) of this section) if the transfer
is subject to chapter 11. See paragraph (c)(2) of this section for
special rules relating to direct skips to or from certain trust
arrangements (as defined in paragraph (c)(2)(ii) of this section).
(2) Special rule for direct skips occurring at death with respect
to property held in trust arrangements--(i) In general. In the case of
certain property held in a trust arrangement (as defined in paragraph
(c)(2)(ii) of this section) at the date of death of the transferor, the
person who is required to make the return and who is liable for the tax
imposed by chapter 13 is determined under paragraphs (c)(2)(iii) and
(iv) of this section.
(ii) Trust arrangement defined. For purposes of this section, the
term trust arrangement includes any arrangement (other than an estate)
which, although not an explicit trust, has the same effect as an
explicit trust. For purposes of this section, the term ``explicit
trust'' means a trust described in Sec. 301.7701-4(a).
(iii) Executor's liability in the case of transfers with respect to
decedents dying on or after June 24, 1996 if the transfer is less than
$250,000. In the case of a direct skip occurring at death, the executor
of the decedent's estate is liable for the tax imposed on that direct
skip by chapter 13 and is required to file Form 706 or Form 706NA (and
not Schedule R-1 of Form 706) if, at the date of the decedent's death--
(A) The property involved in the direct skip is held in a trust
arrangement; and
(B) The total value of the property involved in direct skips with
respect to the trustee of that trust arrangement is less than $250,000.
(iv) Executor's liability in the case of transfers with respect to
decedents dying prior to June 24, 1996 if the transfer is less than
$100,000. In the case of a direct skip occurring at death with respect
to a decedent dying prior to June 24, 1996, the rule in paragraph
(c)(2)(iii) of this section that imposes liability upon the executor
applies only if the property involved in the direct skip with respect
to the trustee of the trust arrangement, in the aggregate, is less than
$100,000.
(v) Executor's right of recovery. In cases where the rules of
paragraphs (c)(2)(iii) and (iv) of this section impose liability for
the generation-skipping transfer tax on the executor, the executor is
entitled to recover from the trustee (if the property continues to be
held in trust) or from the recipient of the property (in the case of a
transfer from a trust), the generation-skipping transfer tax
attributable to the transfer.
(vi) Examples. The following examples illustrate the application of
this paragraph (c)(2) with respect to decedents dying on or after June
24, 1996:
Example 1. Insurance proceeds less than $250,000. On August 1,
1997, T, the insured under an insurance policy, died. The proceeds
($200,000) were includible in T's gross estate for Federal estate
tax purposes. T's grandchild GC, was named the sole beneficiary of
the policy. The insurance policy is treated as a trust under section
2652(b)(1), and the payment of the proceeds to GC is a transfer from
a trust for purposes of chapter 13. Therefore, the payment of the
proceeds to GC is a direct skip. Since the proceeds from the policy
($200,000) are less than $250,000, the executor is liable for the
tax imposed by chapter 13 and is required to file Form 706.
Example 2. Aggregate insurance proceeds of $250,000 or more.
Assume the same facts as in Example 1, except T is the insured under
two insurance policies issued by the same insurance company. The
proceeds ($150,000) from each policy are includible in T's gross
estate for Federal estate tax purposes. T's grandchild, GC1, was
named the sole beneficiary of Policy 1, and T's other grandchild,
GC2, was named the sole beneficiary of Policy 2. GC1 and GC2 are
skip persons (as defined in section 2613). Therefore, the payments
of the proceeds are direct skips. Since the total value of the
policies ($300,000) exceeds $250,000, the insurance company is
liable for the tax imposed by chapter 13 and is required to file
Schedule R-1 of Form 706.
Example 3. Insurance proceeds of $250,000 or more held by
insurance company. On August 1, 1997, T, the insured under an
insurance policy, dies. The policy provides that the insurance
company shall make
[[Page 66924]]
monthly payments of $750 to GC, T's grandchild, for life with the
remainder payable to T's great grandchild, GGC. The face value of
the policy is $300,000. Since the proceeds continue to be held by
the insurance company (the trustee), the proceeds are treated as if
they were transferred to a trust for purposes of chapter 13. The
trust is a skip person (as defined in section 2613(a)(2)) and the
transfer is a direct skip. Since the total value of the policy
($300,000) exceeds $250,000, the insurance company is liable for the
tax imposed by chapter 13 and is required to file Schedule R-1 of
Form 706.
Example 4. Insurance proceeds less than $250,000 held by
insurance company. Assume the same facts as in Example 3, except the
policy provides that the insurance company shall make monthly
payments of $500 to GC and that the face value of the policy is
$200,000. The transfer is a transfer to a trust for purposes of
chapter 13. However, since the total value of the policy ($200,000)
is less than $250,000, the executor is liable for the tax imposed by
chapter 13 and is required to file Form 706.
Example 5. On August 1, 1997, A, the insured under a life
insurance policy, dies. The insurance proceeds on A's life that are
payable under policies issued by Company X are in the aggregate
amount of $200,000 and are includible in A's gross estate. Because
the proceeds are includible in A's gross estate, the generation-
skipping transfer that occurs upon A's death, if any, will be a
direct skip rather than a taxable distribution or a taxable
termination. Accordingly, because the aggregate amount of insurance
proceeds with respect to Company X is less than $250,000, Company X
may pay the proceeds without regard to whether the beneficiary is a
skip person in relation to the decedent-transferor.
(3) Limitation on personal liability of trustee. Except as provided
in paragraph (c)(3)(iii) of this section, a trustee is not personally
liable for any increases in the tax imposed by section 2601 which is
attributable to the fact that--
(i) A transfer is made to the trust during the life of the
transferor for which a gift tax return is not filed; or
(ii) The inclusion ratio with respect to the trust, determined by
reference to the transferor's gift tax return, is erroneous, the actual
inclusion ratio being greater than the reported inclusion ratio.
(iii) This paragraph (c)(3) does not apply if the trustee has or is
deemed to have knowledge of facts sufficient to reasonably conclude
that a gift tax return was required to be filed or that the inclusion
ratio is erroneous. A trustee is deemed to have knowledge of such facts
if the trustee's agent, employee, partner, or co-trustee has knowledge
of such facts.
(4) Exceptions--(i) Legal or mental incapacity. If a distributee is
legally or mentally incapable of making a return, the return may be
made for the distributee by the distributee's guardian or, if no
guardian has been appointed, by a person charged with the care of the
distributee's person or property.
(ii) Returns made by fiduciaries. See section 6012(b) for a
fiduciary's responsibilities regarding the returns of decedents,
returns of persons under a disability, returns of estates and trusts,
and returns made by joint fiduciaries.
(d) Time and manner of filing return--(1) In general. Forms 706,
706NA, 706GS(D), 706GS(D-1), 706GS(T), 709, and Schedule R-1 of Form
706 must be filed with the Internal Revenue Service office with which
an estate or gift tax return of the transferor must be filed. The
return shall be filed--
(i) Direct skip. In the case of a direct skip, on or before the
date on which an estate or gift tax return is required to be filed with
respect to the transfer (see section 6075(b)(3)); and
(ii) Other transfers. In all other cases, on or before the 15th day
of the 4th month after the close of the calendar year in which such
transfer occurs. See paragraph (d)(2) of this section for an exception
to this rule when an election is made under section 2624(c) to value
property included in certain taxable terminations in accordance with
section 2032.
(2) Exception for alternative valuation of taxable termination. In
the case of a taxable termination with respect to which an election is
made under section 2624(c) to value property in accordance with section
2032, a Form 706GS(T) must be filed on or before the 15th day of the
4th month after the close of the calendar year in which the taxable
termination occurred, or on or before the 10th month following the
month in which the death that resulted in the taxable termination
occurred, whichever is later.
(e) Place for filing returns. See section 6091 for the place for
filing any return, declaration, statement, or other document, or copies
thereof, required by chapter 13.
(f) Lien on property. The liens imposed under sections 6324, 6324A,
and 6324B are applicable with respect to the tax imposed under chapter
13. Thus, a lien under section 6324 is imposed in the amount of the tax
imposed by section 2601 on all property transferred in a generation-
skipping transfer until the tax is fully paid or becomes uncollectible
by reason of lapse of time. The lien attaches at the time of the
generation-skipping transfer and is in addition to the lien for taxes
under section 6321.
Sec. 26.2663-1 Recapture tax under section 2032A.
See Sec. 26.2642-4(a)(4) for rules relating to the recomputation of
the applicable fraction and the imposition of additional GST tax, if
additional estate tax is imposed under section 2032A.
Sec. 26.2663-2 Application of chapter 13 to transfers by nonresidents
not citizens of the United States.
(a) In general. This section provides rules for applying chapter 13
of the Internal Revenue Code to transfers by a transferor who is a
nonresident not a citizen of the United States (NRA transferor). For
purposes of this section, an individual is a resident or citizen of the
United States if that individual is a resident or citizen of the United
States under the rules of chapter 11 or 12 of the Internal Revenue
Code, as the case may be. Every NRA transferor is allowed a GST
exemption of $1,000,000. See Sec. 26.2632-1 regarding the allocation of
the exemption.
(b) Transfers subject to chapter 13--(1) Direct skips. A transfer
by a NRA transferor is a direct skip subject to chapter 13 only to the
extent that the transfer is subject to the Federal estate or gift tax
within the meaning of Sec. 26.2652-1(a)(2). See Sec. 26.2612-1(a) for
the definition of direct skip.
(2) Taxable distributions and taxable terminations. Chapter 13
applies to a taxable distribution or a taxable termination to the
extent that the initial transfer of property to the trust by a NRA
transferor, whether during life or at death, was subject to the Federal
estate or gift tax within the meaning of Sec. 26.2652-1(a)(2). See
Sec. 26.2612-1(b) for the definition of a taxable termination and
Sec. 26.2612-1(c) for the definition of a taxable distribution.
(c) Trusts funded in part with property subject to chapter 13 and
in part with property not subject to chapter 13--(1) In general. If a
single trust created by a NRA transferor is in part subject to chapter
13 under the rules of paragraph (b) of this section and in part not
subject to chapter 13, the applicable fraction with respect to the
trust is determined as of the date of the transfer, except as provided
in paragraph (c)(3) of this section.
(i) Numerator of applicable fraction. The numerator of the
applicable fraction is the sum of the amount of GST exemption allocated
to the trust (if any) plus the value of the nontax portion of the
trust.
(ii) Denominator of applicable fraction. The denominator of the
applicable fraction is the value of the property transferred to the
trust reduced as provided in Sec. 26.2642-1(c).
(2) Nontax portion of the trust. The nontax portion of a trust is a
fraction, the numerator of which is the value of property not subject
to chapter 13
[[Page 66925]]
determined as of the date of the initial completed transfer to the
trust, and the denominator of which is the value of the entire trust.
For example, T, a NRA transferor, transfers property that has a value
of $1,000 to a generation-skipping trust. Of the property transferred
to the trust, property having a value of $200 is subject to chapter 13
and property having a value of $800 is not subject to chapter 13. The
nontax portion is .8 ($800 (the value of the property not subject to
chapter 13) over $1,000 (the total value of the property transferred to
the trust).
(3) Special rule with respect to the estate tax inclusion period.
For purposes of this section, the provisions of Sec. 26.2632-1(c),
providing rules applicable in the case of an estate tax inclusion
period (ETIP), apply only if the property transferred by the NRA
transferor is subsequently included in the transferor's gross estate.
If the property is not subsequently included in the gross estate, then
the nontax portion of the trust and the applicable fraction are
determined as of the date of the initial transfer. If the property is
subsequently included in the gross estate, then the nontax portion and
the applicable fraction are determined as of the date of death.
(d) Examples. The following examples illustrate the provisions of
this section. In each example T, a NRA, is the transferor; C is T's
child; and GC is C's child and a grandchild of T:
Example 1. Direct transfer to skip person. T transfers property
to GC in a transfer that is subject to Federal gift tax under
chapter 12 within the meaning of Sec. 26.2652-1(a)(2). At the time
of the transfer, C and GC are NRAs. T's transfer is subject to
chapter 13 because the transfer is subject to gift tax under chapter
12.
Example 2. Transfers of both U.S. and foreign situs property.
(i) T's will established a testamentary trust for the benefit of C
and GC. The trust was funded with stock in a publicly traded U.S.
corporation having a value on the date of T's death of $100,000, and
property not situated in the United States (and therefore not
subject to estate tax) having a value on the date of T's death of
$400,000.
(ii) On a timely filed estate tax return (Form 706NA), the
executor of T's estate allocates $50,000 of GST exemption under
section 2632(a) to the trust. The numerator of the applicable
fraction is $450,000, the sum of $50,000 (the amount of exemption
allocated to the trust) plus $400,000 (the value of the nontax
portion of the trust (4/5 x $500,000)). The denominator is $500,000.
Hence, the applicable fraction with respect to the trust is .9
($450,000/$500,000), and the inclusion ratio is .1 (1 - 9/10).
Example 3. Inter vivos transfer of U.S. and foreign situs
property to a trust and a timely allocation of GST exemption. T
establishes a trust providing that trust income is payable to T's
child for life and the remainder is to be paid to T's grandchild. T
transfers property to the trust that has a value of $100,000 and is
subject to chapter 13. T also transfers property to the trust that
has a value of $300,000 but is not subject to chapter 13. T
allocates $100,000 of exemption to the trust on a timely filed
United States Gift (and Generation-Skipping Transfer) Tax return
(Form 709). The applicable fraction with respect to the trust is 1,
determined as follows: $300,000 (the value of the nontax portion of
the trust) plus $100,000 (the exemption allocated to the trust)/
$400,000 (the total value of the property transferred to the trust).
Example 4. Inter vivos transfer of U.S. and foreign situs
property to a trust and a late allocation of GST exemption. (i) In
1996, T transfers $500,000 of property to an inter vivos trust the
terms of which provide that income is payable to C, for life, with
the remainder to GC. The property transferred to the trust consists
of property subject to chapter 13 that has a value of $400,000 on
the date of the transfer and property not subject to chapter 13 that
has a value of $100,000. T does not allocate GST exemption to the
trust. On the transfer date, the nontax portion of the trust is .2
($100,000/$500,000) and the applicable fraction is also .2
determined as follows: $100,000 (the value of the nontax portion of
the trust)/$500,000 (the value of the property transferred to the
trust).
(ii) In 1999, when the value of the trust is $800,000, T
allocates $100,000 of GST exemption to the trust. The applicable
fraction of the trust must be recomputed. The numerator of the
applicable fraction is $260,000 ($100,000 (the amount of GST
exemption allocated to the trust)) plus $160,000 (the value of the
nontax portion of the trust as of the date of allocation (.2 x
$800,000)). The denominator of the applicable fraction is $800,000.
Accordingly, the applicable fraction with respect to the trust after
the allocation is .325 ($260,000/$800,000) and the inclusion ratio
is .675 (1 - .325).
Example 5. Taxable termination. The facts are the same as in
Example 4 except that, in 2006, when the value of the property is
$1,200,000, C dies and the trust corpus is distributed to GC. The
termination is a taxable termination. If no further GST exemption
has been allocated to the trust, the applicable fraction remains
.325 and the inclusion ratio remains .675.
Example 6. Estate Tax Inclusion Period. (i) T transferred
property to an inter vivos trust the terms of which provided T with
an annuity payable for 10 years or until T's prior death. The
annuity satisfies the definition of a qualified interest under
section 2702(b). The trust also provided that, at the end of the
trust term, the remainder will pass to GC or GC's estate. The
property transferred to the trust consisted of property subject to
chapter 13 that has a value of $100,000 and property not subject to
chapter 13 that has a value of $400,000. T allocated $100,000 of GST
exemption to the trust. If T dies within the 10 year period, the
value of the trust principal will be subject to inclusion in T's
gross estate to the extent provided in sections 2103 and 2104(b).
Accordingly, the ETIP rule under paragraph (c)(3) of this section
applies.
(ii) In year 6 of the trust term, T died. At T's death, the
trust corpus had a value of $800,000, and $500,000 was includible in
T's gross estate as provided in sections 2103 and 2104(b). Thus,
$500,000 of the trust corpus is subject to chapter 13 and $300,000
is not subject to chapter 13. The $100,000 GST exemption allocation
is effective as of T's date of death. Also, the nontax portion of
the trust and the applicable fraction are determined as of T's date
of death. In this case, the nontax portion of the trust is .375,
determined as follows: $300,000 (the value of the trust not subject
to chapter 13)/$800,000 (the value of the trust). The numerator of
the applicable fraction is $400,000, determined as follows: $100,000
(GST exemption previously allocated to the trust) plus $300,000 (the
value of the nontax portion of the trust). The denominator of the
applicable fraction is $800,000. Thus, the applicable fraction with
respect to the trust is .50, unless additional exemption is
allocated to the trust by T's executor or the automatic allocation
rules of Sec. 26.2632-1(d)(2) apply.
Example 7. The facts are the same as in Example 6 except that T
survives the termination date of T's retained annuity and the trust
corpus is distributed to GC. Since the trust was not included in T's
gross estate, the ETIP rules do not apply. Accordingly, the nontax
portion of the trust and the applicable fraction are determined as
of the date of the transfer to the trust. The nontax portion of the
trust is .80 ($400,000/$500,000). The numerator of the applicable
fraction is $500,000 determined as follows: $100,000 (GST exemption
allocated to the trust) plus $400,000 (the value of the nontax
portion of the trust). Accordingly, the applicable fraction is 1,
and the inclusion ratio is zero.
(e) Transitional rule for allocations for transfers made before
December 27, 1995. If an NRA made a GST (inter vivos or testamentary)
after December 23, 1992, and before December 27, 1995 that is subject
to chapter 13 (within the meaning of Sec. 26.2663-2), the NRA will be
treated as having made a timely allocation of GST exemption to the
transfer in a calendar year in the order prescribed in section 2632(c).
Thus, an NRA's unused GST exemption will initially be treated as
allocated to any direct skips made during the calendar year and then to
any trusts with respect to which the NRA made transfers during the same
calendar year and from which a taxable distribution or a taxable
termination may occur. Allocations within the above categories are made
in the order in which the transfers occur. Allocations among
simultaneous transfers within the same category are made pursuant to
the principles of section 2632(c)(2). This transitional allocation rule
will not apply if the NRA transferor, or the executor of the NRA's
estate, as the case may be, elected to have an automatic allocation of
GST exemption not apply by describing on a timely-filed Form 709 for
the year of the
[[Page 66926]]
transfer, or a timely filed Form 706NA, the details of the transfer and
the extent to which the allocation was not to apply.
PART 301--PROCEDURE AND ADMINISTRATION
Par. 2. The authority citation for part 301 continues to read in
part as follows:
Authority: 26 U.S.C. 7805.* * *
Par. 3. Section 301.9100-7T is amended as follows:
a. Paragraph (a)(1) is amended in the table by removing both
entries for ``1431(a)''.
b. Paragraph (a)(4)(i) is amended in the table by removing the
entry for ``1431(a)''.
c. Paragraph (a)(4)(iii) is revised to read as follows:
Sec. 301.9100-7T Time and manner of making certain elections under
the Tax Reform Act of 1986.
(a) * * *
(4) * * *
(iii) Freely revocable election. The election described in this
section under Act section 311(d)(2) is freely revocable.
* * * * *
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 4. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Par. 5. In Sec. 602.101, paragraph (c) is amended by adding entries
in numerical order in the table to read as follows:
Sec. 602.101 OMB Control numbers.
* * * * *
(c) * * *
------------------------------------------------------------------------
CFR part or section where identified and
described Current OMB control No.
------------------------------------------------------------------------
* * * * *
26.2601-1................................. 1545-0985
* * * * *
26.2632-.................................. 1545-0985
* * * * *
26.2642-1................................. 1545-0985
26.2642-2................................. 1545-0985
26.2642-3................................. 1545-0985
26.2642-4................................. 1545-0985
* * * * *
26.2652-2................................. 1545-0985
* * * * *
26.2662-2................................. 1545-0985
* * * * *
------------------------------------------------------------------------
Approved: December 14, 1995
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
Leslie Samuels,
Assistant Secretary of the Treasury
[FR Doc. 95-30873 Filed 12-26-95; 8:45 am]
BILLING CODE 4830-01-U
