Final & Temporary Regulations_TD 8644

66898 Federal Register / Vol. 60, No. 248 / Wednesday, Decernber 2 7 , 1995 1 Rules and Regulations
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-

Section 260 1 --Transitional Rt~les
consohdated under ~ o n l r onumber
l
Transfers After September 25, 1985 and
1545-0985. Responses to this collection Before October 23, 1986
Food and Drug Administration
of information are required to ensure the
Section 26.2601-1 (a)IZ)(i). relat~ngto
proper collectifin n l the generation21 CFR Part 436
inter vivos transfers made after
skipping transfer tax.
September 25. 1985, and before October
An agency ~uaynot co~ld~lct
or
Tests and Methods of Assay of
23 1986, clarifies that chaptcr 13
sponsor,
and
a
person
is
not
required
to
Antibiotic and Antibiotic-Containing
applies to inter vivcrs transfers that are
respond to, a cnllect~onurlless fhe
Drugs
subject to chapter 12 even though a gjit
coiecrion of information displays n
tax is not actually paid because of, for
CFR Correcrjon
valid control number.
example.the marital deduction or the
The estimated burden per respondent unified credit.
In T ~ r l e21 CFR parts 300 to 499,
re\ iwrl as of April 1, 1995, on pages 372 is I hour under control numher 1545Sectiun 26.2601 - 1 (a)(Z)(ii)(which
0985. The time estimates for th?
and 375, the equations fnl loning the
treaLF inter vivas LransIers made after
rrportinfi and reror.dkeeping
sccor~dtable irl hoth 55 436 105 and
September 25. 1985, and before Octobcr
r e q u i r c r ~ ~ e rundrr
~ t s control nunlhcr
436.106 were misprinted Both
23, 1986. as if made on Ocrnher 23,
1545- 1358 arc included in the estimates
dcnorninators In each equation sllauld
1986) clarifies h i i t the value or thp
of
burden
applicahlc
to
Furnas
706.
rend "5" rnstead o f " --5".
transferred property for purposes oi
706NA, 7 O f i C S ( T ) ,706CSID), i'OGGS(DBlLLlNG CODE 7 5 0 5 6 1 4
chapter 13 is determined as of t11e actual
I ) , and 709.
rransfcs date rathcr than as or the
Co~nn~ents
conccl.ning the accul.dCY of deerned transfer date of October 23.
this burclzri estimate rid suggestions for 1986.
DEPARTMENT OF THE TREASURY
r e d u r i ~ ~his
g burden should he directed - Section 25 260 1- l ( 3 )(4) adds an
to the Inrerna! Rcvenue Servicc, Arm:
Internal Revenue Service
rxarllplc illustrating h d t 5 26.260 1I R 5 Keports Cle~rnnceOffirer T:FP.
1 (a)(2) does not apply to transfers made
26 CFR Parts 26, 301, and 602
Wart~ington,DC 2U224, and to the
under n revnuable trust that hect~nles
Office of Managcmenr ~ n Budget,
d
Attn: irrevocable by reason of the grantor's
RD 86441
Oesk Ornicer for the Department of
death after September 25, 1985, but
RIN 1545-AJ11; 1545-AL75: 1545-A089
TI-easury,Office uf Infornlatiun a r ~ d
hcforc October 23, 1986. Those transfer5
Regulatory AfF~irs.Washingtnn. L3C
are not subjcc't to chapter 13 because
Generation-Skipping Transfer Tax
20503.
they are in the nature of tesramentary
AGENCY: Irlternal Revenue Scrvir e ,
Books ilr records relaiing to this
transfers illat nccurred prior to October
Treasury.
collectiorl of informatior1 k u s t be
2 3 . 1986.
retainetl as Iatig as their rontcnh may
ACTION: Firla1 and femporary
Section 26.2601 -\\h)(l)(ii)(C) clarifies
bccorne material in the administration
regulations.
that incidents of ownership irl arl
.. of any ~rjturnalr e l r n t l e law. Generally
ir~suranccpolicy that arc rel~rlquished
SUMMARY: This docurrient contairls firm1
tax returns and tax I (+turninforination
bcfore Seplember 25. 1985, arc not to be
generation-skipplng transfer (CST) tax
are corl(idential. as required by 26
u k e n into acc-ount in determining
regtl!at ~ n n under
s
rhapter 13 of 1he
U.S.C.610.;
whether n trtlst is irrevocable rnr
Internal Reverlue Cndc: (Code),a s addcd
p i ~ r p u s e sof 5 26.26111- 1 (h)(l),w h i c h
by s c r t ion 143 1 ot' the Tax K ~ i o r r nACL
exen~ptskrusts that were irrevocable o n
o l 1986. Changes to the appl icahle law
On M a r c h 15, 1988. 1\12 IRS published September 25. 1485, fmrn thc provisions
wcre made try the T a x Reform Act rrf
in Lhr Feclfral Register a notice of
g f chapter 13.
1 9 8 L the Technical and MisceHarlrnus
proposed rulemaking (53 FK 8469) by
Under 5 26.2601-l(h)(l)(iii)(A),
J
R e v c n ~ eAct of 1988, and the Revenuc
cross reference to Temporary
qualiried terminable interest propwty
Reconciliation Act of 1989.The
R~gulationspublished on the same date
(QTIP) trust that is grandfathered under
regulauons are necessary to provide
in the Federal Register (53 FR 844 1)
5 26.2601-1(b)(1) is treated as if the
guidance to taxpayers so that they may
under 55 2601 and 2662. Subsequently, reverse QTIP election had beer] made
cortlply with chapter 13 of the Code.
on Deccmber 24, 1992, ~e IRS
under section 2G52(a)(3).Example ! in
EFFE(ST\VE O A E : December 77, 1995.
published a second notice of proposed
5 26.2601-1 (b)(l)(iii)iB)has been
FOR FURTHER INFOFtMATION CONTACT:
rulemaking (57 FR 6 1353) amending the revised to illustrate that the initial QTIP
James F. Hogan, (202) 622-3090 (not a
prinr notice. Also. on December 24,
election under section 2523(0 need not
toll free number) .
1992, the IRS published a notice of
be made before September 25, 1985.
proposed rulemaking in the Federal
provided that the trust was irrevocabie
SUPPLEMENTARY INFORMATION:
Register (57 FR 61356) containing
on that date. Further, 5 26.2601Paperwork Reduction Act
proposed regulations under 55 26 1 1,
1I$) {l)[v)(C) has been revised to provide
2612, 2613, 2632. 261 1, 2642,2652.
that in the case of a trust with respect
The collecrion of information
2653.2654, and 2663. The IRS received
to which a reverse QTIP election is
requireme~ltscontained in these final
written and oral comments on the
deemed to have been made, the failure
regulations have been reviewed and
proposed regulations and, on April 2 1 ,
to exercise the right of reirnbursenlent
approved by the Office of Management
1993, a public hearing was held. These
under section 2207A wiil not be treated
and Budget in accordance with the
docunlents adopt final regulations with
as a constructive addition to the trust.
Paperwork R e d ~ ~ c t i oAct
n (44 C1.S.C.
This sonforrns the treatment of trusts
3507) under rontrol numbers 1545-0985 respwt to these noticcs nf proposed
that are irre~ocableon September 2 5 ,
(relating to 55 26.2601 -1 and 26.2662-2) rulema king.
1985, with the rule provided in
The following is a discussion of the
and 1545- t 358 (relating to 53 26.26325 26.2652-1 (aj(3) which applies to truss
marc significant revisions that were
1. 26.2642-1. 2 6 . 2 6 4 1 - 2 . 26.2642-3,
created after September 25, 1985.
26.2642-4 and 26.2652-2). All of these
matic.
DEPARTMENT OF HEALTH AND
HUMAN SERVICES

p a p e w u r k requirenlrnts will h e

Federal Register / Vol. 60, No. 248 ! Wednesday, December 27, 1995 / Rules and Regulations 66899
In 926.2601-l(b)(Z)(iv)(B),the phrase
"or to a generation-skipping trust" has
been added to eliminate any implicatior~
that the provision is limited to
s i t ~ a t i o n sinvolving direct skips. The
provis~onapplies to all gen~ratiorlskipping transfers.
Section 26.2601- l (bI(3) (iii) applies
the trans~tionalrules where the
d ~ r e d ~ was
n t under a mental disnbilirl;
but had nor been adjudged 3 n ~ c t ~ t a l
incompetent. Thrs sectiari has been
clarified to provide that any rvider~ce
subn~ittedto establjsh the decedent's
state of incompetency 1s not ranclusiv~
and is subject to examina~ianI r l
addition, an examplc- has beet1 added to
illustrale the transitional rulrs
applicable in ihc case of mental
jncompc-tcncy.

GST purposes because it will be
rlecessary to determine the GST tax

governing instrument or applicable state
law provides for such treatment.
Section 26.26 I. 2- 1(a)(2) (ii) has been
consequences of distributions and
added to provide that, if a transferor
tertninatians at the time they occur.
makes an addition to an existing trust
Thus, the preamble stated that, in order
to c o n ~ p l ywith the regulation and avoid after the death of a n individual
described in paragraph (a)(Z)(i)of that
a constructive addition, i t must be clear
section (i.e., an individual in the
at the time the nongeneral power is
intervening generation), the additional
exercised that the exercise nlay not
property is treated as being held in a
postpone or suspend vesting, etc.,
separate trust for purposes of chapter
beyartd either Lives i n being plus 2 1
13.
years or 90 years (but not the longer of
Section 261 2(a) (1) defines the term
thc two periods). A commentator has
taxable
termination to mean the
p o i n t ~ dout that the USRAP invalidates
Lerminatiorl of an interest in property
any actempt to exercis~a power Cor the
held in trust iinless, among other things.
lot~gcrof the two periods. Under the
at no time after such terminahon may a
[ISRAP, it will be clear at the time the
distribution (including distributions on
nongrneral pnwer is exercised that the
termination) be made from the trust to
cxcrcise may not postpone or suspend
a skip person. Section 26.261 2vesting, etc.. beyond one of the two
1(b)(1)(iii) , as proposed, has been
periods (but not both). Under the
Uniiorm Statutory Role Against
revised 10 provide that, for put-poses o f
USRAP
the
conlnlon
law
period
(lives
Perpcfuities
In being plus 21 years) is imposed in (hr applying this rule, potential
Thc. noticc- of prr~poccdr u l e m a k !rig
distributions to skip persons are to be
w r n t thal the power holder exercises
published o n 1)ecembt.r 24. 1992, (57 FR thc power in a manner that attempts to
disregarded if the probabilily of
61353) contained a proposed
occurrence is so remote as to be
s u s p t l ~ dor postpone vesting, etc., Ibr
n~odificalionto 5 26.2601negligible. A similar rule has been
the longer of the two perlods. Although
l(t,)(l)(vj(Bj(2). Section 26.2601applied to 526.2612-1(d)(2), regarding
he preamhle published or1 December
1 (b)(1)(vj(B)(Z) provided that the
when a trust is considered a skip
24, 1992, ]nay have been misleading in
exercise of a nnngeneral power of
person. The protlability that a
referring to a "wait and see" aspect of
appointmcnt will not be treated as an
distribution will occur i~ 50 remote as
USRAP. the rnndihcation to 5 26.2601addition to a grandfathered GST trust if
to he negligitlle oniy if it ran be
1
(b)
(
I
)
(v)(3)
(2)
is
11otaf [PCted.
the power is exercised in a manner that
ascertained by actuarial standards that
rnay not postpone or suspend the
Section 2G11 el. SPY.-LST Substantive
there is less than a 5 percent probability
that the distribution will occur.
vesting, absolute owncrship, or power o f Rules
alienatinn of a inlerest in property for a
Section 26.2612-1 (clI2) has been
period, measured from the date of
Definition of Generatio~l-Skippin~
added tu clarrry that the look-through
creation of the trust, extending beyond
Transfers
rule in wctiun 265 1 (el(2) does nut apply
,
any life in being at the d a t ~
of creation
Section 26.261 1-1 has h ~ r revised
r ~
to Tot purposes of dctccmining whcthc~a
of the trust plus a period of 2 1 years
transfer from nne trust trr another trust
clarify that, i n d e l r r i n i ~ ~ i n~vhpther
g
an
(perpetuities period).
is a taxable distrlb~ition.Thus, the
event
is subject to t l ~ cGST lax. rerprence
The proposed trlodification to
must hc made to the most recent Iransfer trar~srcris treated as having bcrr~nlndc.
5 26.2601-l(b)(l)(v)(B) (2).which is
10 t t ~ c
r c c l p i c ~ trust
~ t rather t l ~ a tu
t ~the
that was subjecl l o Federal cstatc or gift
finalized in this document, provides
beneficiaries
o
r
that
trust.
Accnrdinglv.
tax. This is because the most rcrcnt
that the exercise of a nongene~,alpower
a transfer is a taxable distribuliurl only
transfer that was subjpct tu cstsle or girt
of appointment that validly postpones
if the recipient trust itself is a skip
tax establishes the idrnlity of I l ~ r
or suspends the vesting, absolute
person.
transferor,
which
in
turn
delemines
Ihc
ownership, or power of alienation of an
Section 26.2612- 1(e)(3) has beer1
identity of the skip persons and no1-rinterest in property for a term of years
added to providc that, iri d e t c r m i r ~ n g
skip persons.
that will not exceed 90 years (measured
whether a trust is a skip person, trust
from the date of creation of the trust)
irlieresls disclaitned pursuant to a
Definitions
qualified disclaimer described i r ~
will not be considered an exercise that
Section 26.2612-1 {a)(Z)(i)of the
postpones vesting, etc., beyond the
section 25 18 are not taken into ascourlt
proposed regulations provides g~nerally
Example 3 has been added to
perpetuities perlod. The modification
that, for purposes of determining
5 26.261 2-1 (0to jllusuate that a transfer
takes into account the fact that many
whether a transfer constjtures a direct
to a trust pursuant to which a
states have adopted the Uniform
skip, the generation assignment of a
benefjciary who is a skip person has a
Statutory Rule Against Perpetuities
person who would otherwise be a skip
withdrawal power is not a direct skip
(USRAP) which allows either a 90 year
person is redetermined by disregarding
unless the &st is a skip person.
perpetuities period or the common law
Example 9 has been added to
the intervening generation, i f certain
perpetuities period. Under 3 26.2601individuals have died prior to the
5 26.2612-1(n lo illustrate that a taxable
1 (b)(l)(v)(B)(2),as modified, the
nongeneral power may not be exercised transfer (e.g., a predeceased child of the terminaiion may occur upon the
distribution of the e n t ~ r etrust properly
in a manner that postpones vesting, etc., transferor). The s e c t ~ o nhas been
(less arnounrs retained to pay a resulting
for the longer of 90 years or the common modified to provide chat, if an
GST tax and administration expenses).
law period (Lives in being plus 21 years). individual who I S a member of the
Example f 4 contained i n 5 26.261 2intervening generation dies no later than
The discussion in the preamble
1(fl of the proposed regulations
90 days after the transfer, the deceased
published on December 24, 1992,
illustrates that an individual is not
individual is treated as having
indicates that USRAP has a "wait and
treated as having an interest in a trust
pi'edeceased the transferor, if the
see" aspect that is not appropriate for
L,

66900 Federal Register / Vul. 60, No. 248 / Wednesday, December 27, 1995 / Rules a i d Regulations
for purposes of Chapter 13, if the
individuai's support ohligation could be
satisfied at the discretion of t h trustee.
~
This example has been renumbered as
Example 15 and has been clarified to
provide that arl 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.

was allowed under section 2523.
Commentators staled that there w a s ria
support in the statute For this spousal
rule, and any such rule would require
a legislative change. The final
regulatioris eliminate h i s spnusal rule
and Example 5 of 5 26.2632-1 (c) (5).
Section 26.2632-l(c)(2)(ji)(A) has
been added to provide that the ETIP
rules do not apply when the possibility
that the property will be included in the
Allocalion o f GST Exeniption
gross estate of the transf~ror(or the
Vnder 5 26.2632-l(b)(2)(ii)(A) o f the
tratisieror's spouse) is so rcrnote as to be
proposed reguIa(ions, a late ;111ocation oE negligible.
Further, 5 26.2632- 1 (c)(2) (ii) (Bj has
GST exemption is effective o n the date
heen added to prut~tdethat translemed
the EOCIII709 reporting the allocation is
filrd, and is decllled to precede i r l point properky will not be treated as he rng
subject to int lilsion in tile lra~lsferor's
0
:
' time any taxalde event ~lccurringon
spoiise's gross estate, a n d thus, sutjcct
that dale. This section has k e n revised
to an ETIP, where r t ~ eonly power
to specify that the Form 709 is trealed
possessed by tlie spouse is a right to
a s filed on the date it is mailed to the
withdraw no :nore than thr- greater of 5
avpropriate I R S Service C e n t ~ rFurther,
.
percent or $5.000o f thc trust's corpus
rhc late allocation may he made nn a
timely filed Form 709 reporting another and the withdrawal light termiriates
within 60 days of the transfer to the
transfcr .
Section 26.2632- 1 (b)(2) (ii) (R) has
trust.
Sccti011 Zti.2632-l ( c ) ( 5 ) Esarnple 3, o r
bee11 added l o clariry how the CST
the proposed regulatirms ill~lstratrsthat
c x ~ m p t i o nallocated on n Federal girt
if a ~ransferor'sspouse elects gifllax return (Fot-m709) is to be
sp!itting trealrncr~twith I rspect t o the
appurtioned in the event that thc
dinount a l l ~ c a t ~rln
i l the return e x c ~ e d s transferor's g ~ f t h a t is subject to an
the value nl {he transfers reported on thc ETIP, the spousc is treated as the
transferor, of one-haliofthe gift. The
rvtum.
E . ~ , ~ n ~4pof
l e 5 26.2632-1 (b)(2) (iii) of
example has been expanded to illustrate
the proposed rcgc~lationsh a s been
t h a ~sincc
,
the spouse's rlee:ried transfer
revised to better illustrate the effectivr:
is subject to at1 ETIP, if the spousc dies
dale of a ]ale allocation of GST
prior to the terrriir~atinnof the trusl the
excrnptlnrt
spnuse's executor rnay allocate GST
Example 5 of 5 26.2632- 1 (b) (2)(lii)
ricmptiorl to the trust. However. the
l i a ~been addcd to ~llustratethe
~Uocationwill not be effpctive until the
ailtornatic allocation of GST exemption
ETlP terminates on the t ransferor's
lo inter VLVOS direct skips 111 situatiot15
deal],.
where split gift treatment is ~ l e c t e don
Erroncoirs Allocations
an initial gift tax r,t.turn filed attei its
Under the proposcd regulations,
d ~ l cdate.
allocations in excess of the amount of
Section 26.2632-l(d)(1) has been
are void. This
revised to provide that a late allocatlot~ the property tra~~sferred
treatment has been expanded under the
of GST exemption made by an executor
Enal regulations. Thus, any allocation to
with respecr to an inter vivos transfer
a trust rhat has no GST potential at the
not included in the gross estate, is
effective as o f t h e date the allocatinn is
time of the allocation. with respect to
the rransferor for whom the allocation is
filed This rule does not apply to arly
made, is also void. This provision is
automatic allocation under section
2632(b)l1).This revision conforms the
intended to prevcnt the wasting of GST
exemption because u l a n erroneous
regulation to section 2642(b)(3).
allocation with respect to a tesiarnentary
Estale Tax Inclusion Period
or inter vivos transfer. A trust will have
As proposed, 5 26.2632-1 (c)(2) (ii)
no GST poterltial only if there is no
provided that an estate tax inclusion
possibiliq that a GST will be made From
period (ETIP) exists during the period in the trust with respect to the rransferor.
which the transferred property would
have been iricludible in the transferor's Determination of Applicable Fraction
gross estate Imd the transferor retained
Section 26.2642-1 (b)(Z) of the
proposed regulations provided rules for
an interest held by t h e rransferor's
determining the inctusion ratio with
spouse, but only to the extent the
respect to a tmst subject to an ETIP
spouse acquired the interest from the
where GSTs are made from the trust
transferor in an inter vivos transfer that
was not included in the transferor's
during the ETLP. Comments werc
taxable gifts or for which a deduction
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 trans€erorbsunused GST
exemption, or whether such an
allucation could be modified prior to a n
ETIP termination. In response to the
comments, 5 26.2632- 1(c)(1) (providing
rules for the allocat~onof exemption
with respect to a lrc~stsubject to an
ETIP) and 5 26.2642-l(b)(2) clarify that
an allocatiorl made to a trust subject to
an ETIP prior to any distratrution or
termination is nor subject to
modification or revocation. Ha wever,
the allocat~onwill not be effective, i.e.,
the allocation does not operate to fix ~ h c
inclusion ratio of the trust, at the time
it is made. Rather, the allocation
becomes efferiive as or the date of a
subsequer~t distribution or termination
Section 26.2632- 1(c)( 5 ) Examply Z.
illusirales this point.
Section 213.21342-2 of the proposed
regulations provides valuation rules fvr
determining the denominator of the
applicable fraction under section 2642.
Section 26 2642-2(a)(1) of the final
regulations specifies that, i r the
~ case uf
a timely aHoca~ionof CST exemprlon
with respect to an inter vivos transfer.
the denuminatnr nf the applicable
fraction is the fair market value of the
tr-ansferred property, a s finally
delemined for gift tax purposes.
Srction 26.2642-2(b)(l) of the
proposed regulatiorls prov111~5
special
rules for determining the detlominator
OF thc applicable fraclion in situations
involving propcrty subject to the special
valuation rules contained in-scction
2032A. Undcr the proposed regulations.
the special rrse value o f the property
could only be used in determining !he
applicable fraclior) if the property was
transferred in a direct skip. Thus, a
generation-skipping t r u ~ tto which
section 2032A properly was transferred
in a transrer that was not a direct skip
would not receive the benefit of the
favorable valuation rules of section
2032A in determining l h c applicable
fraction with respect to the trust.
Con~mentsstated h a t the proposed
regulation was inconsistent with sectiol-t
2642(b), which provides that the chapter
11 value must be used lo 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 i ! a
~ transfer orher than a
direct skip.
In the event that additional estate tax
is imposed under section 2032A(c) with
respect to tlw property, then the

Federal Register / Vol. 60, No. 248 / Wednesday. Decenlber 27, 1995 / Rules and Regulations 66901
applicable fraction is rcderurnj ined as of
the transferor's date of death. Thus, the
GST tax liability with respect to any
direct skip, taxable termmation, or
taxable distribution occurring prior to
the recapture event would be
recon~putedbased on the redetermined
applicable fraction, and an additional
GST tax would be due. The taxation of
any fufure GST transfers would also be
based a n the redetermined applicable
fractinr~
Sections 26.2642-2(b) (2) a n d (3) of
the proposcd regulations contain special
rules for deiermining the denominator
of the applicable fraction in situations
involving i-esidilary and pecuniary
payments. Gener~lly,r r ~the case of a
residual GST after the paympnt of a
pecuniary amount, the- denominator of
the applicable fraction will bc the estate
tax value o f the total ~ S ~ P available
I S
to
satisfy the pecuniary payment Icss the
amount of the pecuniary payment.
provided the pecuniary payment carries
"appropriate interest" as defined in
3 26 2642-2(b)(4). Under 5 26.26422 (b] (4)
(ii), the payment need not carry
approprlntp interest if, inter alia, the
paymctlt 1s i~~revocably
"set aside"
wi l h i r l 15 rnonths 01" the ~rans~eror's
death. The t'irial regulations clarify that
thls t'xc~ptinnto the appropriate
~nlercstrtquircn~er~t
applies only if the
entire payment is set aside. Further. 1ht.
payment is treated as set aside i f the
amount is segregated and held i11 a
separate account pundi~ifidistribution
Finally, under the proposed regulation.
the appropriate lntcrrst requirement can
be satisfied i1'a pro lala share of estate
income is allocated to Ihrr pecuniary
bequest. The final regu1;rtions clarify
that thc payment of Income inay be
allocated pursuant to the ternls oT the
governing instrument or appiicablc local
law.

Section 26.2612-4(a)(3)of the
propused regulations addresses a
situat:orl where a liretime allocatian is
nnade with respect to a trust when the
bust 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 exemprlon is allocated
to the trust, the noncax portion of the
trust is determined imniediately alter
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 ETLP at the time
the previous allocation of GST
exemption was made. Further, where
such property is included in the gross
estate, the denun~ir~ator
of the
applicahle fractiotl is reduced to reflect

any federal or state estate or inheritance
lax paid by the t r u s ~ .

trust for purposes of chapter 1 3.
notwithstanding that, from a technical
standpoint, only the actuarial value of
the giR to the grandchild is subject to
gift tax at the time of the transfer.
E.rample 8 in 5 26.2652-1 (a)(6) has
been added illustrating that a surviving
spouse will rbot 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,
wherr: the spouse directs in the will that
the estate tax generated by the inclusicln
of the trust is to be paid frcrn the
spouse's probate estate.

Definition of Transieror
Section 26.2652-1 (a)(l) of the
proposed regulations, defining
wansferur, tias been revised to specify
that a surviving spouse is treated as the
lransreror of a qualified domestic trust
(QVOT)described in section 2056A [hat
is included in tkie surviving spouse's
gross estate far federal estate tax
purposes, assurning the trust is not
s u h j e c ~to a reverse QTXP election under
section 2652(a)(3). The surviving spouse
is also the trarlsferor or any QDOT
Separate Shares Treated as Separate
created by the surviving spouse under
Trusts
section 2056(d)(2)(B).
Section 26.2652-1 (d)(4), 3s pr~pflsed,
Section 26.2654-1 of thy proposed
provided that the crealor of 3 sperial
regulations prnvides rules under whrch
power of appointment w i l l be trea~edas "separate shares" of a singlr lrust t11a1
making a transfer subject to eLtate or girt satisfy the requircrrlen~of the
tax (and lhus Lie considered a transferor) regulations will be recognized as
if the holder of the power exercised the -separate trusts for GST purposes.
Under the proposed regulations, a
pnwer in a manner that may postpone
mandatory payrrlenr of a pecuniary
vesting, ctc., OF thc property subject to
amount is &cared 35 a separate share of
the power beyun(1 the permissible
a trusl (and thus a separate trust for
perpetuities pel,ioil. This result is
GST purposes) if curtaln conditions are
i~~ronsistctlt
with section 2041(a)(3),
w h i r h lrtats the holder of the power a s
salisfierl 'The secriorl is clarified to
specify that a n ~ a n d a t payment
o~
is a
~nnkinga trausfcr uncle these
oil.cun~stanccs.Accordinglj~,the
payment that is nondiscretionary and
regulation has bc-crl revised to provide
noncontingent: LC., the paynlent must
that the holder nf the power will be
br: made in all events.
A sentence was added to Example 3.
treated as making a taxable trar~sfcr,if
now contained i n 5 26.2654-1 (a)(5}, to
the holder exercises the Imwer in the
clarify that, where a decedenr's probdtc
manner prescribed.
Section 26.2652-1 (a)( 5 ) h a s heen
estate pours over to a revocable [rust,
added tn specify that whew n donor's
and then amounts are distribuled
spouse consents to have rhr donnr's gict pursuant to the terms of the irtrsi, the
treated as made one-ha11 b> {he spouxe.
distributions will be treated 4 s separate
then for p u r p o s ~ sof chapter 13, the
shares for psrposcs of chapter 1 3
spouse is treated as the 11,ansferorof
Example 4 , now contained in
526.2654-1(a)(5), has been revised Lo
one-half of the property transferred by
the donor. Thus, iT a do1101~transfers
specify that the bequest of a pecuniary
property to a trust a n d retains a
amount payable in kirtd is not treated as
qualified irlteresr as defined in section
a separate share o f the trust, since,
270Z(bj, w i t h the remainder to a
under the facts presented, neither the
g s r ~ d v h i l dii, corlscrlting spouse would
trust nor local law ceqwt rs that the
be treated as the transferor of one-half
assets distributed jn satisfaction of the
the entire property. It was suggested that bequest fairly reflect net appreciation
the spouse should only be treated as the and depreciation. T h i s i s the result
transferor of that portion of the trust
regardless of whether the assets are
corresponding to one-half of the
distributed within 15 months of the
actuarial value of the interest passing to transferor's death.
Comments received suggested thal the
the grandchild, since under section
regulations should allow separale trust
25 13, only one half the gifr to h e
treatment whenever a single inter vivos
grandchild may be treated as made by
trust was recognized as separate [rusts
the consenting spouse. However.
under local law. For example, an inter
treating the consenting spouse as the
vivos trust provides income to child for
transferor of one-half of the enrire trust
life, but when each grandchild reaches
is consistent with the general rreatment
age 35, a separate trust is to be
accorded other split-irkrest transfers.
established for the child, the grandchild,
For example, if a transferor transferred
property in trust retainirlg a n interest
and the grandchiid's issue. Comments
that qualif~edunder section 2702(b),
suggested that the Service should
recognize each trust established when a
with the remainder to the transferor's
grandchild reaches age 35 as a separate
grandchild, thc trarlsferor would be
considered the trat~sfrrorof the entire
trust, and allow a late allocation of GST

66902 Federal Register / Vol. 60, No. 248 1 Wednesday, December 27, 1995 / Rules and Regulations
exerrlpliurl specifically to thai tnlst
when severance OCCIIFS.
This suggestion was rejected.
Generally, the adoption of this approacli
w o u l d 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
jtatutc. See, e.g., sections 2642(a)(l)lAj
and (a) ('2).
Division of a Single Trust Into Separate

Trusts
Under 5 26.2654- 1 (c) ol'the proposed
~ , e g ~ ~ l a t i oanteltamentary
s,
trust could
be severed inlo several parts, provided
the severance was commenced prior to
the filjng of the estate tax return.
Furthel,, tllc new trusts created pursuant
In the severmce had t be identical im
the old trusts. F u r example, a
tcstalnentary [lust providing for inconle
to spouse, rerl~ainderto be dtvlticd
equally between child a n 2 grarldchild
could only be severed into two trusts
both providing income to spouse wit11
the remairider lo be divided betwc-en
child and grandchild. Fir~allv,an inter
vivos trust could not be scvcred unless
i t cunslsted of separate shares, or
different transfrrrors had contributed to
the trilst.
The regtilation ha5 been clarified to
specify that thc division of a slnglc trust
that is iricluded in the rraiufemr's gross
estate wiI1 be r e c o g n i z ~ di r either: ( I )
The single trust ronsists of separate
shares and is tl>us,treated as scparatc
trusts; or (2) the single trust, although
not consisting of separate shat,c.s, is
s u v e r ~ dinto scparair [rusts pursuant to
a directir~nin the gr~verninginstrumen1
providing that the trust is to be divided
into separate trusts on the transretor's
death; or I3.l the governing instrument
does not requiru or direct severance but
the !rust is severed pursuant to the
discretionary aulhority 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 tn chiid
and grandchild. the trust may bc
severed to create two trusts, one with
income ta spouse, remainder to child
and a second with incorne 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
resilting trusts must provide for the
same succession of interests as provided
for under [he original trusts. Thus, a
trust providing for an income interest ro
a child, with remainder to a grandchild,

couid not be divided into one trust for
the child (equal in value to the child's
income inteiest) arid another fol- the
grandchild.
The proposed regulations provided
that the new trusts must be funded with
a fractional share ofeach and every
asset held by the original slngle trust.
The provision has been revised lo
provide that the new trusts may also be
funded on a nonpro rata basis, based on
the fair market value of ihe assets
selected on the date n l severance. Thus.
the executor or trustee may select ihe
assets with which to fund each trust,
and need not fractionalize carh asset.
An pxample has been adlieti to
illustrate that, if a revocable trust
jnclctdcd in the t r ~ i s f e r o r ' sgross estate
ia, under the terms of the trust, divided
into ~ n u l t i p lIrusLs
~:
o n the lran~t'rrn~-'s
death, t h e n each trust e s ~ a b l i s l ~will
~rl
Ile treated as a scparatct trust for GST

citizenship of the skip person receiving
the beneficial interest or property.
Under 5 26.2663-2(c) as proposed, if
the property involved in a generationshipping 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
terminatiorl or distribution, the property
passes to a skip person who is a U.S.
resident or citizen: and (2) at the time
o f rht: initial transfer to the skip person
or trust, a lineal descendant of the
transferor, who is a lineal anrcstor or
the s k ~ pperson, was a resident or
citizen of the U.S. This rule applied
regardless of ihe situs of the property at
the time of the actual distribution or
lernlination Scctinn 26.2663-2(fl nf the
propos~dregulations providcd for lhe
automatic allocation of a NRA's
$1.(100,000 GST ex~nlptionr-egardlcss of
whether the transfer was a direct skip
purposes.
Thus, thc proposed regulations
subjected non-U.S. situs property to thtt
Due Date of Rrt~rrn
GST tax based on the status of (he skip
New 5 26.2662-1(d)(2) has been
personlrccipient of the property at the
added 10 provlde that h e due dale of
tirllc the property was received, and the
the return with rcsper.1 to a taxable
status of the generation that was
lermination subject to all election u n d e ~ skipped at [he time of the initial transfer
section 2624 Irl [relating to alternate
to the trwt 01.skip persorl.
valuation in acc:or dance wilh section
Many r:oruments were cr~ticalof this
2032) is .4pr11 15 th or the fulIowing year approach. In general. these comments
in which the taxable ternilnatian
emphasized that the estate and gift tax
occurred or on or beforc the 15th r l a v of provisions subject transfers by NRAs to
the tenth month fnllowing tile nionlh tn
transfer tax based on thc situs nC the
which thr death that resulted In hi.
properly, riot the starus of the rccipienl.
taxable lrrrn ~ n a t i r ~occurrerl.
n
w l ~ ~ c h e v e l Therefore,
.
the proposed regulations
15 later.
ccinflict wlth section 2663, which
provides that tlic regulations should be
Application nf Cl~dptcr13 10
cnnsiste~ltwith the principles of
Norjt esideni Alicns
chapters I 1 and 12 of rhc Internal
Sect101i EG63(2) requires lhat the
Revcnue Code (Code), Furd~cr,the
Commissioner prescri bc r~guiatiolls,
cornrtlentators argued that treating a
consistcut wilh the provis~onsof'
NRA who transfers non-U.S. situs
chapters l l and 1 2 , providing for the
property as a trarlsferor for GST tax
application of t h e GST tax to a
purposes would conflict with the
rlilnresident alieri (NRA). In general.
definition or transferor under section
under 5 26.2663-"(b) as proposed, the
2652, since the transfer would not he
GST tax applied to inler vjvos and
subject to estate or gift tax, Under
testan~entarydirect skip transfers by a
section 2652, an individual is a
NRA, to the extent that the transferred
transferor only to the extent the transfer
is subject to U.S. gift tax or estate tax.
property was U.S. situs property such
The proposed regulatiolls have been
that the transier was subject to a gift tax
revised to address these concerns.Thus.
(in the case of inter vivos transfers) OF
an eslate tax (in the case of testamentary Ihe rules in the proposed regulations
applying chapter I3 to transfers of
transfers). Similarly, in the case of
property that were not subject tu estate
transfers in trust, chapter 13 applied to
or gift tax have been eliminated. Under
taxable t ~rminationsand distributions
the final regulations. the application of
to the extent the initial transfer ta the
thr CST tax will be limited to situations
trust (whether inter vivos or
where an estate or gift tax is imposed on
testamentary) consisted of U.S. situs
the properly T11us. the GST tax will
property, such illat the initial transfer
apply to inier vivos and testamentary
was subject to the gift or estate tax.This
direct skip transfers by a NRA transferor
was the case regardless of the sirus of
to the extent a gift tax is imposed on the
the property at the time of the actual
trarlsfer fin the case o r an inter vjvos
distiibution or termination and
transfer) or the transferred property is
regardless of the resiclency or

Federal Register / Vol. 60, No. 248 / Wednesday, December 27, 1995 / Rules and Regulations 66903
.

A

-

included in the transferor's grass cstatc
(in tl-re case of a testmrntary direct
skip). In the case of taxable termirlatinns
and taxable distributions, chapter 13
will apply lo the extent a gift tax was
imposed 011the initial lransfer to the
trust, or the property was included in
the transferor's gross estate.
Accordingly, under the fjnal regulations
(in the absence of a situation involving
an ETIP]. the appiicalion of Chapter I3
is generally dependent on the s i t u s of
the property at rhe tirne of the initial
transfer. The regulatioris contain special
rules far determining the applicabltfraction and inclrision ralio whe1-ea
trusi is funded with both U.S. and
foreign situs property.
In genrri-al, the r u l ~ snf 5 26.2632-1
.~pplywith respect to the allocation o i
rhe exemption However, the ETIP rule
provided in 5 26.2632-1 (c) dpplies orlly
if r he property rransfcrrrd h y the NRA
is sub\rquentiy included in rt~rtransfer-or'sgross citate. The final
regulalions provide transitional rclief
w i t h resperl ro NRA's who made CST
trarlsfers and t-died on t h e automatic
allocarinn rules jn the proposed
I-egu!ations.
It has beet1 determined that this
Treasury decision is riot a significant
regulatory action as defined in EO
t2866. Therefcre, a regulatory
assessment is not reqiired. It has also
heen deicrmined [ha1 ~ection553(b) of
f h r Adminlstratlve Procedure Act !5
IJ5. C. c h a p t e ~5 ) and the Regulat<>ry
Flexibility Art ( 5 U.S.C. chapter 6) do
not appl v to these regula~lons,and
therefore, a Kcgulatury Flexibility
Anaiysls 1s not required. Pursuant to
wction 7805 (fl of the Intemal Revenue
Codc, the not~ceof proposed rulemaking
pr,eceding [hest. regulatiorls was
subm)tted to the SrnalI Business
Admlnutration for comment on i l s
~mpacton small business.
Drafting Information. The principal
author of these regulations is James F.
Hogan, Office of !he Chief Counsel, IRS.
Other personnel from the IRS and
Treasury Department participated in
their development.

List of Subjects
33 CPR Part 26

Estate taxes, Keporting and
recordkeeping requirements.
26 CFR P a n 3301

Employment taxes. Estate taxes,
Excise taxes. GiR taxes, Irlcome taxes.
Penallies, Reporting and recordkeeping
requirements.

.-

26 CFR part 602

Reporting and recordkecping
requ irernents.
Adoption of Amendments lo the
Regulations
.4ccordingly, 26 CFR parts 26, 301.
and 602 arc amended as followsParagraph 1. Part 26 is revised to rend
PART 26--GENERATION-SKIPPING
TRANSFER TAX REGULATIONS
UNDER THE TAX REFORM ACT O F
1986
Sec.
26 2600- I
26.2601-1
26,261I - I

Table of conients.
Effective datm.
Generation-ski1)ping trarisfer

definrcl

Uefnitions.
Skip peison.
Allocation of GST exr:n~ption.
Applicable rate clirax
inclusion ratio
Valuation.
Special rule for charitable lead
annuity trusl,.
26.2642-4 Redc~erminatinnoi applicable
frac~lun.
26.264 2-5 Finality of inclusion ratio.
26.2652-1 Tral~sferordefined: other
definitions.
2 6 2652-2 Special electiurl for qualified
t~rminnbleinterest prnpcrty.
26.2653-1 Taxatlrm o f lnultlple skips.
2G.2654-I Certain trusts treated a5 separate
trusts.
26.26GZ- 1 C~neration-skippingtransfer tax
r e t u r n lequirernents.
Recapture tax onder section
26 2663-t
26 2612-1
26.26 13- 1
2ti.2632-1
26.2641- 1.
26.2642- 1
26 2642-2
26.2642-3

7U3ZA.
21i.ZGG3-2 Applicatiorl of chaple~!3 tu
transfers by nurlresidents not c i t i ~ e n suf
thc Ul>ited. States.

Authority 2 6 1J.S.C 7805 a ~ l d26 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.
5 26.260&1 Table of contents.
This section lists the captions that
appear in the regulations under sections
2601 through 2663.
526.2601-1

m e c t i r e dates.

(a) Transfers subject to the generationskipping transfer tax.
{I)In general.
(2) Certalr~transfers treated as it made after
Octoher 22. 1986
(3) Certain trust events treated as If
occurring after October 22. 1986.
( 4 ) Example.
(b) Exceptions.
f 1) Irrevocable trusts.

-LA--

12) Transition rule for wills o r revocable
trusts executed before October 22. 1986.

(3) Transition rule in the r2se of mental
incompetency.
(4) Exceptions to additions rule.
(c) Additional effectivr datcs.
§ZCi.ZGI 1-1

Generation-skippingtrarlsrrr

defined.
(a) Direcl skip.
(I) In general.
(2) Special rule for ce:taln lineal
dehcendants.
jb! Taxable lerrnination.
( I ) In gcnerai.
(2) Partial termination.
( c ) Taxable distribution.
( 1 ) In g e ~ ~ e r a l .
(2) Look-through rule not to apply
(d) Skip person.
(e) Interest i n tru!,t.
(I) In general.
(2) Exceptions.
(3) Disclaimers

(0Exa~nples

5 26.2613- I

Skip person.

(a) General rule.
(b) Lifetime allocations.
(1) Automatic allocalion lo direct skips
(2) Allacatiuri to other transfers.
Ic) Special rilles durlng ;in estate i a ~
iricl~~sion
periud.
(1) In generzl
(2) Estate tax incl~~sion
period defined.
(3) Ternllnation of an ETIP.
(4) Treatment or direct skips.
(5) Examples
(d) Allocalibn.. after the ~r~lksTeror's
death
(1) Al1oc;rrion Ly executor
(2j Auturnatir. allocation ahcr death.
526264 1 - 1

i l p p l l r ~ b l erate

r~fld.\.

Inclusion ratio.
(a) In genr:ral.
Ih) N ~ ~ m e r a t oofr applicable fraction.
( 1 ) In general.
(2) CSTs occurring during an ETIP.
(c) Denominator of applicable fraction.
{ I ) lri general.
(2) Zcro denominator
(3) Nontaxable gifts
(d) Examples.

526.2642- 1

(a) Lifetime Uansters.
(I) In general.
(2) Special r u l e Tor late allocations during
life.
{b) Transfers at death.
( 1 ) In general.
(2) Special rule lor pecuniary paymenls.
(3) Special rule for residual transfers after
payment of a pecuniary payment.
(4) Appropriate interest.
{c) Examples.

$26-2642-3 Sp~cislrule fur charita He lead
annuity trusts.
(a) In general.
(b) Adjusted CST exemption defined.
{ c )Example.

66904 F ~ d e r a lRegister / Vol.
$26 2W2-4
fraction.

60, No. 248 1 Wednesday, December 27, 1995 / Rules and Rcmlations

Uedeterminatiun uf applicable

(a) In general.
(1) Multiple transfers to a

single trust.

('2)Consolidation of separate trusts
(3) Pruperty included
estatc

ill

transferor's gross

(4) Ilnposition of recapture tax under
sectiun 2032A.
(b) Examplc~.

3 26.2642-5 Finality of inclusion ratio.
(a) Dirpct skips.
(b) Other GSTs.

9 26,2652- 1 Transfeto~,defined: other
definitiorls.
(a) Transferor defined.
(1) In gen~:al.
(2) 'rransfe1.s5~1bjer.tto Federal r:>tare or

glr~rau
(31 Special rule for certain QTIP trrlsts.
(4) Exercise of certain nongenerai power,
o f appointment.
(5) Split-pill rransfcrs.
(6) Example5
(b) Trust &tined.
(11 In general.
IZ) Exan~pies.
(c 1 Trustee del'ined.

(4) Time and manner of filing return.
(I) In general

(2) Exceptinns For alternative valuation of
taxable terminanon.
(ej Place for filing returns.
(0 Lien on property
526.2663-1 Kecapr!~ret a x under secrior:
2032A.
526.2663-2 Application of chapter 13 to
transfers by t~umesidentsn o i tritizens of the
U n i ed
~ States.

{al In gcncral.
(bf Transfers subject to Chapter 13.
(1) Dlrcct skips.
(2) Taxable distribulions and taxable
terminallons
(c)Trusts funded in part with property
subject to Chapter 13 and In p i r t with
property 1101 s u b j ~ rIc~Chapter 13
( 1 ) In general
(21,Nontax purtiorl of the trust.
(3) S p ~ c i arule
l
with respect lo estate tax
incIusi~>n
pcriod.
(d)Evsmples.
(e) l'ransitiunal rule IrJf,allocations fur
transfers made before Decemlle~27. 19 95

trusts not subject to chapter 13 by
reason of the transition rules in
paragraphs (b) (2) and (3)af this section.
The provisions o f 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) or this section is noi applicable to
transfers under a revocable trust that
became irrevocable by reason of the
transferor's death after September 25,
1985, h u t before October 23. 1986:
Example T created a revocabie trust cln
Septcmbrr 30. 1985. that became irrevocahlr
when T dled on October 10. 19 86 Although

llle trust terminated in favor uFa grandchld
o l T, the transfer lu the grandchild is not
treated as uccurr'mg on October 23. 1986,
pursuant to pardgraph (a)(2) of this sccbon
hecause it is no1 an inter vivor tralsier
subject tcl chapter 12 nit transfer is ~iof
suhjet,t to chapter 13 tccause i t is in the
nature of a testamentar) trdrlrfer that
occurred priur 11, October 23 I986

(b) Excepriuns-(I) Irrcvocabie
In general. The pi.ov~sionsc>f
chapter 13 do not apply to any
(d) Executor defincd.
generation-skipping trarlsfcr under a
(e) lr~tt:rcFile Typeapplication/pdfFile Modified2007-06-01File Created2007-06-01