Td 9421

Federal Register / Vol. 73, No. 148 / Thursday, July 31, 2008 / Rules and Regulations
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 26
[TD 9421]
RIN 1545–BE70

Severance of a Trust for GenerationSkipping Transfer (GST) Tax Purposes
Internal Revenue Service (IRS),
Department of the Treasury (Treasury).
ACTION: Final regulations.
AGENCY:

SUMMARY: This document contains final
regulations providing guidance
regarding the generation-skipping
transfer (GST) tax consequences of the
severance of a trust in a manner that is
effective under state law, but that does
not meet the requirements of a qualified
severance under section 2642(a)(3) of
the Internal Revenue Code (Code).
These final regulations also provide
guidance regarding the GST tax
consequences of a qualified severance of
a trust with an inclusion ratio between
zero and one into more than two
resulting trusts. These final regulations
also provide special funding rules
applicable to the non-pro rata division
of certain assets between or among
resulting trusts. The regulations will
affect trusts that are subject to the GST
tax.
DATES: Effective Date: The regulations
are effective July 31, 2008.
Applicability Date: For dates of
applicability, see § 26.2642–6(k)(1).
FOR FURTHER INFORMATION CONTACT:
Mayer R. Samuels, (202) 622–3090 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:

yshivers on PROD1PC62 with RULES

Background
Section 2642(a)(3) was added to the
Code by the Economic Growth and Tax
Relief Reconciliation Act of 2001
(EGTRRA), Public Law 107–16 (115
Stat. 38 (2001). Under section
2642(a)(3), if a trust is divided into two
or more trusts in a ‘‘qualified
severance,’’ the separate trusts resulting
from the severance (resulting trusts),
which may have different inclusion
ratios, will be recognized as separate
trusts for GST tax purposes. (As used in
this guidance, ‘‘resulting trust’’ has no
relation to a resulting trust recognized
under the common law of trusts and
principles of equity.) Once the resulting
trusts are recognized as separate trusts,
the transferor’s lifetime GST tax
exemption may be allocated separately
to either trust. In addition, whether or
not a GST taxable event occurs is

VerDate Aug<31>2005

15:05 Jul 30, 2008

Jkt 214001

determined separately for each resulting
trust.
On August 24, 2004, proposed
regulations under section 2642(a)(3)
regarding qualified severances were
published in the Federal Register (REG–
145987–03, 2004–39 IRB 519, 69 FR
51967). Final regulations were
published on August 2, 2007 (TD 9348,
2007–37 IRB 563, 72 FR 42291). The
Treasury Department and IRS
determined that certain comments
received in response to the proposed
regulations, and certain additional rules
under section 2642(a)(3), should be
addressed in a separate notice of
proposed rulemaking. On August 2,
2007, the Federal Register published a
notice of proposed rulemaking (REG–
128843–05, 2007–37 IRB 587, 72 FR
42340) addressing those comments and
rules. The IRS received one submission
containing several comments on the
notice of proposed rulemaking. The
comments contained in the submission
are discussed below. No public hearing
was requested or held.
Explanation of Provisions and
Summary of Comments
Section 26.2642–6(d)(4) of the
existing regulations provides that each
of the trusts resulting from a qualified
severance must be funded with a
fraction or percentage of the original
trust, and that the sum of those fractions
or percentages must be one or one
hundred percent, respectively. The
existing regulations provide that this
requirement may be satisfied by the
funding of each resulting trust with that
trust’s fraction or percentage share of
each asset held by the original trust (a
pro rata division). Section 26.2642–
6(d)(4) of the proposed regulations
permits the funding of the resulting
trusts on a non-pro rata basis, provided
that a special funding rule is also
satisfied. Specifically, this section of the
proposed regulations provides that, if
the assets of the original trust are
divided between or among the resulting
trusts on a non-pro rata basis, no
discounts or other reductions from the
value of the asset owned by the original
trust, arising by reason of the division
of the original trust’s interest in the
asset between or among the resulting
trusts, are permitted for purposes of
determining the amount used to fund
each resulting trust. Instead, solely for
funding purposes, each resulting trust’s
interest in the stock of a closely held
corporation, partnership interest, or
other asset must be valued by
multiplying the fair market value of the
asset held in the original trust as of the
date of severance by the fractional or
percentage interest in that asset being

PO 00000

Frm 00035

Fmt 4700

Sfmt 4700

44649

distributed to that resulting trust. Thus,
for purposes of the requirements of a
qualified severance, regardless of
whether the funding is done on a pro
rata basis, the cumulative value of the
resulting trusts equals the value of the
original trust.
The commentators pointed out that
funding pursuant to this rule would
result in an allocation different from the
allocation that would normally be
obtained from funding based on the
state law fair market value standard
which would take the discounts into
account. The commentators expressed
concern that the resulting shift in
beneficial interests between or among
the resulting trusts could violate the
trustee’s fiduciary duty of impartiality
under applicable state law. Further, the
commentators pointed out that the
proposed rule could be avoided through
the post-severance purchase and sale of
assets between resulting trusts at fair
market value. The commentators
recommended an alternative funding
rule under which the value of the
original trust would be calculated as the
sum of the fair market value of the
assets to be held by the resulting trusts.
This recommendation was not
adopted in the final regulations. It is
difficult to see how the fiduciary duty
of impartiality is challenged more by
this funding rule than by a pro rata
division of each asset of the original
trust. The funding rule in the proposed
regulations was intended to facilitate
the funding of the resulting trusts
without the cost or need for review of
appraisals of each severed interest, and
thus to improve the administrability of
the severance provisions. This funding
rule produces a bright line test, the same
result whether or not the trust assets are
divided on a pro rata basis, and
recognizes that in many circumstances,
where a trust is severed for tax purposes
into two identical trusts with the same
or related beneficiaries, any closely held
stock or partnership units divided
between the two resulting trusts are
likely to be sold as a unit without any
actual reduction in value that may be
reflected in the claimed discounts. Any
use of post-severance sales between
resulting trusts to avoid these funding
rules may constitute mere steps in a prearranged transaction.
The commentators pointed out that
the nonqualified severance illustrated in
§ 26.2642–6(j), Example 3, of the
existing regulations will result in a
taxable event for GST tax purposes (that
is, a taxable termination or taxable
distribution) if that severance occurs on
or after the proposed regulations are
adopted as final. This is because, under
the proposed regulations, the severed

E:\FR\FM\31JYR1.SGM

31JYR1

yshivers on PROD1PC62 with RULES

44650

Federal Register / Vol. 73, No. 148 / Thursday, July 31, 2008 / Rules and Regulations

trust is treated as a separate trust for
GST tax purposes. Accordingly,
cautionary language has been added to
this example to the effect that a GST
taxable event will result as a
consequence of the severance.
It was determined that § 26.2642–6(j),
Example 12 of the proposed regulations
addresses the same issue covered in
Example 8 of § 26.2654–1(a)(5).
Therefore, Example 12 has been
removed from the final regulations and
the examples have been renumbered
accordingly.
As requested by the commentators, a
new example, § 26.2642–6(j), Example
13, has been added to confirm that a
trust resulting from a nonqualified
severance may subsequently be severed
in a qualified severance.
The commentators noted that the
proposed regulations under § 26.2654–
1(a)(1)(iii) address the treatment of
severances resulting in separate trusts
that are required under the terms of a
trust instrument (mandatory severances)
but that are neither severances
otherwise recognized under section
2654 nor qualified severances under
section 2642. The proposed regulations
conclude that the separate shares or
trusts resulting from such a severance,
if recognized as separate trusts under
state law, will be recognized as separate
for GST tax purposes. The
commentators questioned why the
proposed changes to the regulations
under section 2654 must address those
severances that result in separate trusts
when this issue is already addressed in
§ 26.2642–6(h) of the proposed
regulations dealing with nonqualified
severances. Section 26.2654–1(a)(1)(iii)
was intended to address only mandatory
severances that, as with the other types
of severances covered by § 26.2654–1(a),
are dictated by the terms of the trust. On
the other hand, § 26.2642–6(h)
addresses discretionary severances, that
is, severances that are elective and
within the discretion of the trustee. The
severances described in § 26.2654–1 are
governed by that section. Therefore, the
proposed addition to this section has
not been removed.
The proposed regulations under
section 2654 state a general rule that
separate shares or trusts resulting from
a mandatory severance, that are
recognized as separate trusts for GST tax
purposes, will not be treated as separate
trusts for purposes of filing income tax
returns or calculating any other taxes.
The comments noted that this statement
should not apply to shares or trusts that
are recognized as separate trusts under
local law. Rather, this statement should
apply only to separate shares created
within a single trust that are not

VerDate Aug<31>2005

15:05 Jul 30, 2008

Jkt 214001

recognized under local law as separate
trusts. The final regulations reflect this
change.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) applies only to
§ 26.2642–6(d)(7)(iii) of these
regulations. It is hereby certified that
this provision will not have a significant
economic impact on a substantial
number of small entities. Accordingly, a
Regulatory Flexibility Analysis is not
required. This provision directly affects
individuals, not entities. Because the
remaining sections of these regulations
do not impose on small entities a
collection of information requirement,
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, the notice
of proposed rulemaking preceding these
regulations was submitted to the Small
Business Administration for comment
on their impact on small business.
Drafting Information
The principal author of these final
regulations is Mayer R. Samuels, Office
of the Associate Chief Counsel
(Passthroughs and Special Industries),
IRS. Other personnel from the IRS and
Treasury participated in their
development.
List of Subjects in 26 CFR Part 26
Estate taxes, Reporting and
recordkeeping requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 26 is
amended as follows:

■

PART 26—GENERATION-SKIPPING
TRANSFER TAX REGULATIONS
UNDER THE TAX REFORM ACT OF
1986
Paragraph 1. The authority citation
for part 26 continues to read in part as
follows:

■

Authority: 26 U.S.C. 7805 * * *
■ Par. 2. In § 26.2600–1, the table of
contents is amended by adding the entry
for § 26.2642–6(h) to read as follows:

§ 26.2600–1

*

*

Table of contents.

*

§ 26.2642–6

*

PO 00000

*

Frm 00036

*

*

Qualified severance.

*

*

Fmt 4700

*

Sfmt 4700

(h) Treatment of trusts resulting from
a severance that is not a qualified
severance.
*
*
*
*
*
■ Par. 3. Section 26.2642–6 is amended
as follows:
■ 1. Paragraphs (d)(4) and (d)(7) are
revised.
■ 2. Paragraph (h) is added.
■ 3. Paragraph (j) Example 3 is revised.
■ 4. Paragraph (j) Examples 6, 9, 12, and
13 are added.
■ 5. Paragraph (k)(1) is revised.
The additions and revisions read as
follows:
§ 26.2642–6

*

Qualified severance.

*
*
*
*
(d) * * *
(4) The single trust (original trust) is
severed on a fractional basis, such that
each new trust (resulting trust) is
funded with a fraction or percentage of
the original trust, and the sum of those
fractions or percentages is one or one
hundred percent, respectively. For this
purpose, the fraction or percentage may
be determined by means of a formula
(for example, that fraction of the trust
the numerator of which is equal to the
transferor’s unused GST tax exemption,
and the denominator of which is the fair
market value of the original trust’s
assets on the date of severance). The
severance of a trust based on a
pecuniary amount does not satisfy this
requirement. For example, the severance
of a trust is not a qualified severance if
the trust is divided into two trusts, with
one trust to be funded with $1,500,000
and the other trust to be funded with the
balance of the original trust’s assets.
With respect to the particular assets to
be distributed to each separate trust
resulting from the severance, each such
trust may be funded with the
appropriate fraction or percentage (pro
rata portion) of each asset held by the
original trust. Alternatively, the assets
may be divided among the resulting
trusts on a non-pro rata basis, based on
the fair market value of the assets on the
date of severance. However, if a
resulting trust is funded on a non-pro
rata basis, each asset received by a
resulting trust must be valued, solely for
funding purposes, by multiplying the
fair market value of the asset held in the
original trust as of the date of severance
by the fraction or percentage of that
asset received by that resulting trust.
Thus, the assets must be valued without
taking into account any discount or
premium arising from the severance, for
example, any valuation discounts that
might arise because the resulting trust
receives less than the entire interest

E:\FR\FM\31JYR1.SGM

31JYR1

yshivers on PROD1PC62 with RULES

Federal Register / Vol. 73, No. 148 / Thursday, July 31, 2008 / Rules and Regulations
held by the original trust. See paragraph
(j), Example 6 of this section.
*
*
*
*
*
(7)(i) In the case of a qualified
severance occurring after GST tax
exemption has been allocated to the
trust (whether by an affirmative
allocation, a deemed allocation, or an
automatic allocation pursuant to the
rules contained in section 2632), if the
trust has an inclusion ratio as defined in
§ 26.2642–1 that is greater than zero and
less than one, then either paragraph
(d)(7)(ii) or (iii) of this section must be
satisfied.
(ii) The trust is severed initially into
only two resulting trusts. One resulting
trust must receive that fractional share
of the total value of the original trust as
of the date of severance that is equal to
the applicable fraction, as defined in
§ 26.2642–1(b) and (c), used to
determine the inclusion ratio of the
original trust immediately before the
severance. The other resulting trust
must receive that fractional share of the
total value of the original trust as of the
date of severance that is equal to the
excess of one over the fractional share
described in the preceding sentence.
The trust receiving the fractional share
equal to the applicable fraction shall
have an inclusion ratio of zero, and the
other trust shall have an inclusion ratio
of one. If the applicable fraction with
respect to the original trust is .50, then,
with respect to the two equal trusts
resulting from the severance, the trustee
may designate which of the resulting
trusts will have an inclusion ratio of
zero and which will have an inclusion
ratio of one. Each separate trust
resulting from the severance then may
be further divided in accordance with
the rules of this section. See paragraph
(j), Example 7, of this section.
(iii) The trust is severed initially into
more than two resulting trusts. One or
more of the resulting trusts in the
aggregate must receive that fractional
share of the total value of the original
trust as of the date of severance that is
equal to the applicable fraction used to
determine the inclusion ratio of the
original trust immediately before the
severance. The trust or trusts receiving
such fractional share shall have an
inclusion ratio of zero, and each of the
other resulting trust or trusts shall have
an inclusion ratio of one. (If, however,
two or more of the resulting trusts each
receives the fractional share of the total
value of the original trust equal to the
applicable fraction, the trustee may
designate which of those resulting trusts
will have an inclusion ratio of zero and
which will have an inclusion ratio of
one.) The resulting trust or trusts with

VerDate Aug<31>2005

15:05 Jul 30, 2008

Jkt 214001

an inclusion ratio of one must receive in
the aggregate that fractional share of the
total value of the original trust as of the
date of severance that is equal to the
excess of one over the fractional share
described in the second sentence of this
paragraph. See paragraph (j), Example 9,
of this section.
*
*
*
*
*
(h) Treatment of trusts resulting from
a severance that is not a qualified
severance. Trusts resulting from a
severance (other than a severance
recognized for GST tax purposes under
§ 26.2654–1) that does not meet the
requirements of a qualified severance
under paragraph (b) of this section will
be treated, after the date of severance, as
separate trusts for purposes of the GST
tax, provided that the trusts resulting
from such severance are recognized as
separate trusts under applicable state
law. The post-severance treatment of the
resulting trusts as separate trusts for
GST tax purposes generally permits the
allocation of GST tax exemption, the
making of various elections permitted
for GST tax purposes, and the
occurrence of a taxable distribution or
termination with regard to a particular
resulting trust, with no GST tax impact
on any other trust resulting from that
severance. Each trust resulting from a
severance described in this paragraph
(h), however, will have the same
inclusion ratio immediately after the
severance as that of the original trust
immediately before the severance. (See
§ 26.2654–1 for the inclusion ratio of
each trust resulting from a severance
described in that section.) Further, any
trust resulting from a nonqualified
severance may be severed subsequently,
pursuant to a qualified severance
described in this § 26.2642–6.
*
*
*
*
*
(j) * * *
Example 3. Severance based on actuarial
value of beneficial interests. In 2004, T
establishes Trust, an irrevocable trust
providing that income is to be paid to T’s
child C during C’s lifetime. Upon C’s death,
Trust is to terminate and the assets of Trust
are to be paid to GC, C’s child, if living, or,
if GC is not then living, to GC’s estate. T
properly elects, under section 2632(c)(5), not
to have the automatic allocation rules
contained in section 2632(c) apply with
respect to T’s transfers to Trust, and T does
not otherwise allocate GST tax exemption
with respect to Trust. Thus, Trust has an
inclusion ratio of one. In 2009, the trustee of
Trust, pursuant to applicable state law,
divides Trust into two separate trusts, Trust
1 for the benefit of C (and on C’s death to C’s
estate), and Trust 2 for the benefit of GC (and
on GC’s death to GC’s estate). The document
severing Trust directs that Trust 1 is to be
funded with an amount equal to the actuarial
value of C’s interest in Trust prior to the

PO 00000

Frm 00037

Fmt 4700

Sfmt 4700

44651

severance, determined under section 7520 of
the Internal Revenue Code. Similarly, Trust
2 is to be funded with an amount equal to
the actuarial value of GC’s interest in Trust
prior to the severance, determined under
section 7520. Trust 1 and Trust 2 do not
provide for the same succession of interests
as provided under the terms of the original
trust. Therefore, the severance is not a
qualified severance. Furthermore, because
the severance results in no non-skip person
having an interest in Trust 2, Trust 2
constitutes a skip person under section 2613
and, therefore, the severance results in a
taxable termination subject to GST tax.

*

*

*

*

*

Example 6. Funding of severed trusts on a
non-pro rata basis. (i) T’s will establishes an
irrevocable trust (Trust) for the benefit of T’s
descendants. As a result of the allocation of
GST tax exemption, the applicable fraction
with respect to Trust is .60 and Trust’s
inclusion ratio is .40 [1–.60]. Pursuant to
authority granted under applicable state law,
on August 1, 2008, the trustee executes a
document severing Trust into two trusts,
Trust 1 and Trust 2, each of which is
identical to Trust. The instrument of
severance provides that the severance is
intended to qualify as a qualified severance
within the meaning of section 2642(a)(3) and
designates August 3, 2008, as the date of
severance (within the meaning of paragraph
(d)(3) of this section). The instrument further
provides that Trust 1 and Trust 2 are to be
funded on a non-pro rata basis with Trust 1
funded with assets having a fair market value
on the date of severance equal to 40% of the
value of Trust’s assets on that date and Trust
2 funded with assets having a fair market
value equal to 60% of the value of Trust’s
assets on that date. The fair market value of
the assets used to fund each trust is to be
determined in compliance with the
requirements of paragraph (d)(4) of this
section.
(ii) On August 3, 2008, the fair market
value of the Trust assets totals $4,000,000,
consisting of 52% of the outstanding
common stock in Company, a closely-held
corporation, valued at $3,000,000 and
$1,000,000 in cash and marketable securities.
Trustee proposes to divide the Company
stock equally between Trust 1 and Trust 2,
and thus transfer 26% of the Company stock
to Trust 1 and 26% of the stock to Trust 2.
In addition, the appropriate amount of cash
and marketable securities will be distributed
to each trust. In accordance with paragraph
(d)(4) of this section, for funding purposes,
the interest in the Company stock distributed
to each trust is valued as a pro rata portion
of the value of the 52% interest in Company
held by Trust before severance, without
taking into account, for example, any
valuation discount that might otherwise
apply in valuing the noncontrolling interest
distributed to each resulting trust.
(iii) Accordingly, for funding purposes,
each 26% interest in Company stock
distributed to Trust 1 and Trust 2 is valued
at $1,500,000 (.5 × $3,000,000). Therefore,
Trust 1, which is to be funded with
$1,600,000 (.40 × $4,000,000), receives
$100,000 in cash and marketable securities
valued as of August 3, 2008, in addition to

E:\FR\FM\31JYR1.SGM

31JYR1

44652

Federal Register / Vol. 73, No. 148 / Thursday, July 31, 2008 / Rules and Regulations

the Company stock, and Trust 2, which is to
be funded with $2,400,000 (.60 × $4,000,000),
receives $900,000 in cash and marketable
securities in addition to the Company stock.
Therefore, the severance is a qualified
severance, provided that all other
requirements of section 2642(a)(3) and this
section are satisfied.

*

*

*

*

*

Example 9. Regulatory qualified severance.
(i) In 2004, T establishes an inter vivos
irrevocable trust (Trust) providing that trust
income is to be paid annually in equal shares
to T’s children, A and B, for 10 years. Trust
provides that the trustee has discretion to
make additional distributions of principal to
A and B during the 10-year term without
adjustments to their shares of income or the
trust remainder. If either (or both) dies prior
to the expiration of the 10-year term, the
deceased child’s share of trust income is to
be paid to the child’s then living
descendants, per stirpes, for the balance of
the trust term. At the expiration of the 10year term, the corpus is to be distributed
equally to A and B; if A and B (or either or
them) is not then living, then such decedent’s
share is to be distributed instead to such
decedent’s then living descendants, per
stirpes. T allocates GST tax exemption to
Trust such that Trust’s applicable fraction is
.25 and its inclusion ratio is .75.
(ii) In 2006, pursuant to applicable state
law, the trustee severs the trust into three
trusts: Trust 1, Trust 2, and Trust 3. The
instrument severing Trust provides that Trust
1 is to receive 50% of Trust’s assets, Trust
2 is to receive 25% of Trust’s assets, and
Trust 3 is to receive 25% of Trust’s assets.
All three resulting trusts are identical to
Trust, except that each has different
beneficiaries: A and A’s issue are designated
as the beneficiaries of Trust 1, and B and B’s
issue are designated as the beneficiaries of
Trust 2 and Trust 3. The severance
constitutes a qualified severance, provided
that all other requirements of section
2642(a)(3) and this section are satisfied. Trust
1 will have an inclusion ratio of 1. Because
both Trust 2 and Trust 3 have each received
the fractional share of Trust’s assets equal to
Trust’s applicable fraction of .25, trustee
designates that Trust 2 will have an inclusion
ratio of one and that Trust 3 will have an
inclusion ratio of zero.

yshivers on PROD1PC62 with RULES

*

*

*

*

*

Example 12. Other severance that does not
meet the requirements of a qualified
severance. (i) In 2004, T establishes an
irrevocable inter vivos trust (Trust) providing
that Trust income is to be paid to T’s
children, A and B, in equal shares for their
joint lives. Upon the death of the first to die
of A and B, all Trust income will be paid to
the survivor of A and B. At the death of the
survivor, the corpus is to be distributed in
equal shares to T’s grandchildren, W and X
(with any then-deceased grandchild’s share
being paid in accordance with that
grandchild’s testamentary general power of
appointment). W is A’s child and X is B’s
child. T elects under section 2632(c)(5) not
to have the automatic allocation rules
contained in section 2632(c) apply with
respect to T’s transfers to Trust, but T
allocates GST tax exemption to Trust

VerDate Aug<31>2005

15:05 Jul 30, 2008

Jkt 214001

resulting in Trust having an inclusion ratio
of .30.
(ii) In 2009, the trustee of Trust, as
permitted by applicable state law, divides
Trust into two separate trusts, Trust 1 and
Trust 2. Trust 1 provides that trust income
is to be paid to A for life and, on A’s death,
the remainder is to be distributed to W (or
pursuant to W’s testamentary general power
of appointment). Trust 2 provides that trust
income is to be paid to B for life and, on B’s
death, the remainder is to be distributed to
X (or pursuant to X’s testamentary general
power of appointment). Because Trust 1 and
Trust 2 do not provide A and B with the
contingent survivor income interests that
were provided to A and B under the terms
of Trust, Trust 1 and Trust 2 do not provide
for the same succession of interests in the
aggregate as provided by Trust. Therefore, the
severance does not satisfy the requirements
of this section and is not a qualified
severance. Provided that Trust 1 and Trust 2
are recognized as separate trusts under
applicable state law, Trust 1 and Trust 2 will
be recognized as separate trusts for GST tax
purposes pursuant to paragraph (h) of this
section, prospectively from the date of the
severance. However, Trust 1 and Trust 2 each
have an inclusion ratio of .30 immediately
after the severance, the same as the inclusion
ratio of Trust prior to severance.
Example 13. Qualified severance following
a non-qualified severance. Assume the same
facts as in Example 12, except that, as of
November 4, 2010, the trustee of Trust 1
severs Trust 1 into two trusts, Trust 3 and
Trust 4, in accordance with applicable local
law. The instrument severing Trust 1
provides that both resulting trusts have
provisions identical to Trust 1. The terms of
the instrument severing Trust 1 further
provide that Trust 3 is to be funded on a pro
rata basis with assets having a fair market
value as of the date of severance equal to
70% of the value of Trust 1’s assets on that
date, and Trust 4 is to be funded with assets
having a fair market value as of the date of
severance equal to 30% of the value of Trust
1’s assets on that date. The severance
constitutes a qualified severance, provided
that all other requirements of section
2642(a)(3) and this section are satisfied. Trust
3 will have an inclusion ratio of zero and
Trust 4 will have an inclusion ratio of one.

(k) * * *
(1) In general. Except as otherwise
provided in this paragraph (k), this
section applies to severances occurring
on or after August 2, 2007. Paragraph
(d)(7)(iii), paragraph (h), and Examples
9, 12 and 13 of paragraph (j) of this
section apply to severances occurring on
or after September 2, 2008.
■ Par. 4. Section 26.2654–1 is amended
as follows:
■ 1. Paragraph (a)(1)(i) is revised.
■ 2. Paragraph (a)(1)(iii) is added.
■ 3. In paragraph (a)(5), Example 8 is
revised.
■ 4. Paragraph (d) is added.
The additions and revisions read as
follows:

PO 00000

Frm 00038

Fmt 4700

Sfmt 4700

§ 26.2654–1 Certain trusts treated as
separate trusts.

(a) * * * (1) * * * (i) * * * 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
§ 1.663(c)–3. However, except as
provided in paragraph (a)(1)(iii) of this
section, 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,
except with respect to shares or trusts
that are treated as separate trusts under
local law, 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. See
§ 26.2642–6 and paragraph (b) of this
section regarding the treatment, for
purposes of Chapter 13, of separate
trusts resulting from the discretionary
severance of a single trust.
*
*
*
*
*
(iii) Mandatory severances. For
purposes of this section, if the governing
instrument of a trust requires the
division or severance of a single trust
into separate trusts upon the future
occurrence of a particular event not
within the discretion of the trustee or
any other person, and if the trusts
resulting from such a division or
severance are recognized as separate
trusts under applicable state law, then
each resulting trust is treated as a
separate trust for purposes of Chapter
13. For this purpose, the rules of
paragraph (b)(1)(ii)(C) of this section
apply with respect to the severance and
funding of the trusts. Similarly, if the
governing instrument requires the
division of a single trust into separate
shares under the circumstances
described in this paragraph, each such
share is treated as a separate trust for
purposes of Chapter 13. The postseverance treatment of the resulting
shares or trusts as separate trusts for

E:\FR\FM\31JYR1.SGM

31JYR1

Federal Register / Vol. 73, No. 148 / Thursday, July 31, 2008 / Rules and Regulations
GST tax purposes generally permits the
allocation of GST tax exemption, the
making of various elections permitted
for GST tax purposes, and the
occurrence of a taxable distribution or
termination with regard to a particular
resulting share or trust, with no GST tax
impact on any other trust or share
resulting from that severance. The
treatment of a single trust as separate
trusts under this paragraph (a)(1),
however, 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, if those portions are not
treated as separate trusts under local
law. Also, additions to, and
distributions from, such trusts are
allocated pro rata among the separate
trusts, unless the governing instrument
expressly provides otherwise. Each
separate share and each trust resulting
from a mandatory division or severance
described in this paragraph will have
the same inclusion ratio immediately
after the severance as that of the original
trust immediately before the division or
severance.
*
*
*
*
*
(5) * * *

yshivers on PROD1PC62 with RULES

Example 8. Subsequent mandatory
division into separate trusts. 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 on the child’s death to
such child’s children (grandchildren of T).
The separate shares that come into existence
when the youngest child reaches age 21 will
be recognized as of that date as separate
trusts for purposes of Chapter 13. The
inclusion ratio of the separate trusts will be
identical to the inclusion ratio of the trust
before the severance. Any allocation of GST
tax exemption to the trust after T’s youngest
child reaches age 21 may be made to any one
or more of 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, provided that the severance
and funding of the separate trusts meets the
requirements of this section.

*

*
*
*
*
(d) Effective date. Paragraph (a)(1)(i),
paragraph (a)(1)(iii), and Example 8 of

paragraph (a)(5) apply to severances
occurring on or after September 2, 2008.
Sherri L. Brown,
(Acting) Deputy Commissioner for Services
and Enforcement.
Approved: July 20, 2008.
Eric Solomon,
Assistant Secretary of the Treasury, (Tax
Policy).
[FR Doc. E8–17503 Filed 7–30–08; 8:45 am]
BILLING CODE 4830–01–P

DEPARTMENT OF HOMELAND
SECURITY
Coast Guard
33 CFR Part 105
[Docket Nos. TSA–2006–24191; USCG–
2006–24196]

Transportation Worker Identification
Credential (TWIC) Implementation in
the Maritime Sector; Hazardous
Materials Endorsement for a
Commercial Driver’s License
AGENCY:

United States Coast Guard;

DHS.
Notice of compliance date,
Captain of the Port Zones Charleston,
Long Island Sound, Jacksonville, and
Savannah.

ACTION:

SUMMARY: This document informs
owners and operators of facilities
located within Captain of the Port Zones
Charleston, Long Island Sound,
Jacksonville, and Savannah that they
must implement access control
procedures utilizing TWIC no later than
December 1, 2008.
DATES: The compliance date for the
TWIC regulations found in 33 CFR part
105 for Captain of the Port Zones
Charleston, Long Island Sound,
Jacksonville, and Savannah is December
1, 2008.
ADDRESSES: Comments and material
received from the public, as well as
documents mentioned in this document
as being available in the docket, are part
of dockets TSA–2006–24191 and
USCG–2006–24196, and are available
for inspection or copying at the Docket
Management Facility, U.S. Department
of Transportation, West Building
Ground Floor, Room W12–140, 1200
New Jersey Avenue, SE., Washington,
DC 20590, between 9 a.m. and 5 p.m.,
Monday through Friday, except Federal
holidays. You may also find this docket
on the Internet at http://
www.regulations.gov.

If
you have questions on this Notice, call

FOR FURTHER INFORMATION CONTACT:

VerDate Aug<31>2005

15:05 Jul 30, 2008

Jkt 214001

PO 00000

Frm 00039

Fmt 4700

Sfmt 4700

44653

LCDR Jonathan Maiorine, telephone 1–
877–687–2243. If you have questions on
viewing the docket, call Renee V.
Wright, Program Manager, Docket
Operations, telephone 202–493–0402.
SUPPLEMENTARY INFORMATION:
I. Regulatory History
On May 22, 2006, the Department of
Homeland Security (DHS) through the
United States Coast Guard (Coast Guard)
and the Transportation Security
Administration (TSA) published a joint
notice of proposed rulemaking entitled
‘‘Transportation Worker Identification
Credential (TWIC) Implementation in
the Maritime Sector; Hazardous
Materials Endorsement for a
Commercial Driver’s License’’ in the
Federal Register (71 FR 29396). This
was followed by a 45-day comment
period and four public meetings. The
Coast Guard and TSA issued a joint
final rule, under the same title, on
January 25, 2007 (72 FR 3492)
(hereinafter referred to as the original
TWIC final rule). The preamble to that
final rule contains a discussion of all the
comments received on the NPRM, as
well as a discussion of the provisions
found in the original TWIC final rule,
which became effective on March 26,
2007.
On May 7, 2008, the Coast Guard and
TSA issued a final rule to realign the
compliance date for implementation of
the Transportation Worker
Identification Credential. 73 FR 25562.
The date by which mariners need to
obtain a TWIC, and by which owners
and operators of vessels, facilities, and
outer continental shelf facilities, who
have not otherwise been required to
implement access control procedures
utilizing TWIC, must implement those
procedures, is now April 15, 2009
instead of September 25, 2008. Owners
and operators of facilities that must
comply with 33 CFR part 105 will still
be subject to earlier, rolling compliance
dates, as set forth in 33 CFR 105.115(e).
The Coast Guard will continue to
announce rolling compliance dates, as
provided in 33 CFR 105.115(e), at least
90 days in advance via notices
published in the Federal Register. The
final compliance date for all COTP
Zones will not be later than April 15,
2009.
II. Notice of Facility Compliance Date—
COTP Zones Charleston, Long Island
Sound, Jacksonville, and Savannah
Title 33 CFR 105.115(e) currently
states that ‘‘[f]acility owners and
operators must be operating in
accordance with the TWIC provisions in
this part by the date set by the Coast
Guard in a Notice to be published in the

E:\FR\FM\31JYR1.SGM

31JYR1