II

106TH CONGRESS

1ST SESSION S. 1975

To amend the Internal Revenue Code of 1986 to modify the tax on generation-skipping transfers to eliminate certain traps for the unwary and

otherwise improve the fairness of such tax.

IN THE SENATE OF THE UNITED STATES

NOVEMBER 19, 1999

Mr. MACK (for himself and Mr. BREAUX) introduced the following bill; which

was read twice and referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to modify

the tax on generation-skipping transfers to eliminate certain traps for the unwary and otherwise improve the

fairness of such tax.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Generation-Skipping

5 Transfer Tax Amendments Act of 1999’’.
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1 SEC. 2. DEEMED ALLOCATION OF GST EXEMPTION TO LIFE2 TIME TRANSFERS TO TRUSTS; RETROACTIVE

3 ALLOCATIONS.

4 (a) IN GENERAL.—Section 2632 of the Internal Rev5 enue Code of 1986 (relating to special rules for allocation

6 of GST exemption) is amended by redesignating sub7 section (c) as subsection (e) and by inserting after sub8 section (b) the following new subsections:

9 ‘‘(c) DEEMED ALLOCATION TO CERTAIN LIFETIME

10 TRANSFERS TO GST TRUSTS.—

11 ‘‘(1) IN GENERAL.—If any individual makes an

12 indirect skip during such individual’s lifetime, any

13 unused portion of such individual’s GST exemption

14 shall be allocated to the property transferred to the

15 extent necessary to make the inclusion ratio for such

16 property zero. If the amount of the indirect skip ex17 ceeds such unused portion, the entire unused portion

18 shall be allocated to the property transferred.

19 ‘‘(2) UNUSED PORTION.—For purposes of para20 graph (1), the unused portion of an individual’s

21 GST exemption is that portion of such exemption

22 which has not previously been—

23 ‘‘(A) allocated by such individual,

24 ‘‘(B) treated as allocated under subsection

25 (b) with respect to a direct skip occurring dur-
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1 ing or before the calendar year in which the in2 direct skip is made, or

3 ‘‘(C) treated as allocated under paragraph

4 (1) with respect to a prior indirect skip.

5 ‘‘(3) DEFINITIONS.—

6 ‘‘(A) INDIRECT SKIP.—For purposes of

7 this subsection, the term ‘indirect skip’ means

8 any transfer of property subject to the tax im9 posed by chapter 12 made to a GST trust.

10 ‘‘(B) GST TRUST.—The term ‘GST trust’

11 means a trust that could have a generation12 skipping transfer with respect to the transferor

13 unless—

14 ‘‘(i) the trust instrument provides that

15 more than 25 percent of the trust corpus

16 must be distributed to or may be with17 drawn by 1 or more individuals who are

18 non-skip persons—

19 ‘‘(I) before the date that the indi20 vidual attains age 46,

21 ‘‘(II) on or before 1 or more

22 dates specified in the trust instrument

23 that will occur before the date that

24 such individual attains age 46, or
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1 ‘‘(III) upon the occurrence of an

2 event that, in accordance with regula3 tions prescribed by the Secretary, may

4 reasonably be expected to occur before

5 the date that such individual attains

6 age 46;

7 ‘‘(ii) the trust instrument provides

8 that more than 25 percent of the trust cor9 pus must be distributed to or may be with10 drawn by 1 or more individuals who are

11 non-skip persons and who are living on the

12 date of death of another person identified

13 in the instrument (by name or by class)

14 who is more than 10 years older than such

15 individuals;

16 ‘‘(iii) the trust instrument provides

17 that, if 1 or more individuals who are non18 skip persons die on or before a date or

19 event described in clause (i) or (ii), more

20 than 25 percent of the trust corpus either

21 must be distributed to the estate or estates

22 of 1 or more of such individuals or is sub23 ject to a general power of appointment ex24 ercisable by 1 or more of such individuals;
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1 ‘‘(iv) the trust is a trust any portion

2 of which would be included in the gross es3 tate of a non-skip person (other than the

4 transferor) if such person died immediately

5 after the transfer;

6 ‘‘(v) the trust is a charitable lead an7 nuity trust (within the meaning of section

8 2642(e)(3)(A)) or a charitable remainder

9 annuity trust or a charitable remainder

10 unitrust (within the meaning of section

11 664(d)); or

12 ‘‘(vi) the trust is a trust with respect

13 to which a deduction was allowed under

14 section 2522 for the amount of an interest

15 in the form of the right to receive annual

16 payments of a fixed percentage of the net

17 fair market value of the trust property (de18 termined yearly) and which is required to

19 pay principal to a non-skip person if such

20 person is alive when the yearly payments

21 for which the deduction was allowed termi22 nate.

23 For purposes of this subparagraph, the value of

24 transferred property shall not be considered to

25 be includible in the gross estate of a non-skip
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1 person or subject to a right of withdrawal by

2 reason of such person holding a right to with3 draw so much of such property as does not ex4 ceed the amount referred to in section 2503(b)

5 with respect to any transferor, and it shall be

6 assumed that powers of appointment held by

7 non-skip persons will not be exercised.

8 ‘‘(4) AUTOMATIC ALLOCATIONS TO CERTAIN

9 GST TRUSTS.—For purposes of this subsection, an

10 indirect skip to which section 2642(f) applies shall

11 be deemed to have been made only at the close of

12 the estate tax inclusion period. The fair market

13 value of such transfer shall be the fair market value

14 of the trust property at the close of the estate tax

15 inclusion period.

16 ‘‘(5) APPLICABILITY AND EFFECT.—

17 ‘‘(A) IN GENERAL.—An individual—

18 ‘‘(i) may elect to have this subsection

19 not apply to—

20 ‘‘(I) an indirect skip, or

21 ‘‘(II) any or all transfers made

22 by such individual to a particular

23 trust, and

24 ‘‘(ii) may elect to treat any trust as a

25 GST trust for purposes of this subsection
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1 with respect to any or all transfers made

2 by such individual to such trust.

3 ‘‘(B) ELECTIONS.—

4 ‘‘(i) ELECTIONS WITH RESPECT TO

5 INDIRECT SKIPS.—An election under sub6 paragraph (A)(i)(I) shall be deemed to be

7 timely if filed on a timely filed gift tax re8 turn for the calendar year in which the

9 transfer was made or deemed to have been

10 made pursuant to paragraph (4) or on

11 such later date or dates as may be pre12 scribed by the Secretary.

13 ‘‘(ii) OTHER ELECTIONS.—An election

14 under clause (i)(II) or (ii) of subparagraph

15 (A) may be made on a timely filed gift tax

16 return for the calendar year for which the

17 election is to become effective.

18 ‘‘(d) RETROACTIVE ALLOCATIONS.—

19 ‘‘(1) IN GENERAL.—If—

20 ‘‘(A) a non-skip person has an interest or

21 a future interest in a trust to which any trans22 fer has been made,

23 ‘‘(B) such person—

24 ‘‘(i) is a lineal descendant of a grand25 parent of the transferor or of a grand-
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1 parent of the transferor’s spouse or former

2 spouse, and

3 ‘‘(ii) is assigned to a generation below

4 the generation assignment of the trans5 feror, and

6 ‘‘(C) such person predeceases the trans7 feror,

8 then the transferor may make an allocation of any

9 of such transferor’s unused GST exemption to any

10 previous transfer or transfers to the trust on a

11 chronological basis.

12 ‘‘(2) SPECIAL RULES.—If the allocation under

13 paragraph (1) by the transferor is made on a gift

14 tax return filed on or before the date prescribed by

15 section 6075(b) for gifts made within the calendar

16 year within which the non-skip person’s death

17 occurred—

18 ‘‘(A) the value of such transfer or trans19 fers for purposes of section 2642(a) shall be de20 termined as if such allocation had been made

21 on a timely filed gift tax return for each cal22 endar year within which each transfer was

23 made,

24 ‘‘(B) such allocation shall be effective im25 mediately before such death, and
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1 ‘‘(C) the amount of the transferor’s unused

2 GST exemption available to be allocated shall

3 be determined immediately before such death.

4 ‘‘(3) FUTURE INTEREST.—For purposes of this

5 subsection, a person has a future interest in a trust

6 if the trust may permit income or corpus to be paid

7 to such person on a date or dates in the future.’’.

8 (b) CONFORMING AMENDMENT.—Paragraph (2) of

9 section 2632(b) of such Code is amended by striking ‘‘with

10 respect to a direct skip’’ and inserting ‘‘or subsection

11 (c)(1)’’.

12 (c) EFFECTIVE DATES.—

13 (1) DEEMED ALLOCATION.—Section 2632(c) of

14 the Internal Revenue Code of 1986 (as added by

15 subsection (a)), and the amendment made by sub16 section (b), shall apply to transfers subject to chap17 ter 11 or 12 of such Code made after December 31,

18 1999, and to estate tax inclusion periods ending

19 after December 31, 1999.

20 (2) RETROACTIVE ALLOCATIONS.—Section

21 2632(d) of the Internal Revenue Code of 1986 (as

22 added by subsection (a)) shall apply to deaths of

23 non-skip persons occurring after the date of the en24 actment of this Act.
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1 SEC. 3. SEVERING OF TRUSTS.

2 (a) IN GENERAL.—Subsection (a) of section 2642 of

3 the Internal Revenue Code of 1986 (relating to inclusion

4 ratio) is amended by adding at the end the following new

5 paragraph:

6 ‘‘(3) SEVERING OF TRUSTS.—

7 ‘‘(A) IN GENERAL.—If a trust is severed in

8 a qualified severance, the trusts resulting from

9 such severance shall be treated as separate

10 trusts thereafter for purposes of this chapter.

11 ‘‘(B) QUALIFIED SEVERANCE.—For pur12 poses of subparagraph (A)—

13 ‘‘(i) IN GENERAL.—The term ‘quali14 fied severance’ means the division of a sin15 gle trust and the creation (by any means

16 available under the governing instrument

17 or under local law) of 2 or more trusts if—

18 ‘‘(I) the single trust was divided

19 on a fractional basis, and

20 ‘‘(II) the terms of the new trusts,

21 in the aggregate, provide for the same

22 succession of interests of beneficiaries

23 as are provided in the original trust.

24 ‘‘(ii) TRUSTS WITH INCLUSION RATIO

25 GREATER THAN ZERO.—If a trust has an

26 inclusion ratio of greater than zero and
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1 less than 1, a severance is a qualified sev2 erance only if the single trust is divided

3 into 2 trusts, one of which receives a frac4 tional share of the total value of all trust

5 assets equal to the applicable fraction of

6 the single trust immediately before the sev7 erance. In such case, the trust receiving

8 such fractional share shall have an inclu9 sion ratio of zero and the other trust shall

10 have an inclusion ratio of 1.

11 ‘‘(iii) REGULATIONS.—The term

12 ‘qualified severance’ includes any other

13 severance permitted under regulations pre14 scribed by the Secretary.

15 ‘‘(C) TIMING AND MANNER OF

16 SEVERANCES.—A severance pursuant to this

17 paragraph may be made at any time. The Sec18 retary shall prescribe by forms or regulations

19 the manner in which the qualified severance

20 shall be reported to the Secretary.’’.

21 (b) EFFECTIVE DATE.—The amendment made by

22 this section shall apply to severances after the date of the

23 enactment of this Act.
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1 SEC. 4. MODIFICATION OF CERTAIN VALUATION RULES.

2 (a) GIFTS FOR WHICH GIFT TAX RETURN FILED OR

3 DEEMED ALLOCATION MADE.—Paragraph (1) of section

4 2642(b) of the Internal Revenue Code of 1986 (relating

5 to valuation rules, etc.) is amended to read as follows:

6 ‘‘(1) GIFTS FOR WHICH GIFT TAX RETURN

7 FILED OR DEEMED ALLOCATION MADE.—If the allo8 cation of the GST exemption to any transfers of

9 property is made on a gift tax return filed on or be10 fore the date prescribed by section 6075(b) for such

11 transfer or is deemed to be made under section 2632

12 (b)(1) or (c)(1)—

13 ‘‘(A) the value of such property for pur14 poses of subsection (a) shall be its value as fi15 nally determined for purposes of chapter 12

16 (within the meaning of section 2001(f)(2)), or,

17 in the case of an allocation deemed to have been

18 made at the close of an estate tax inclusion pe19 riod, its value at the time of the close of the es20 tate tax inclusion period, and

21 ‘‘(B) such allocation shall be effective on

22 and after the date of such transfer, or, in the

23 case of an allocation deemed to have been made

24 at the close of an estate tax inclusion period, on

25 and after the close of such estate tax inclusion

26 period.’’.
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1 (b) TRANSFERS AT DEATH.—Subparagraph (A) of

2 section 2642(b)(2) of such Code is amended to read as

3 follows:

4 ‘‘(A) TRANSFERS AT DEATH.—If property

5 is transferred as a result of the death of the

6 transferor, the value of such property for pur7 poses of subsection (a) shall be its value as fi8 nally determined for purposes of chapter 11; ex9 cept that, if the requirements prescribed by the

10 Secretary respecting allocation of post-death

11 changes in value are not met, the value of such

12 property shall be determined as of the time of

13 the distribution concerned.’’.

14 (c) EFFECTIVE DATE.—The amendments made by

15 this section shall take effect as if included in the amend16 ments made by section 1431 of the Tax Reform Act of

17 1986.

18 SEC. 5. RELIEF PROVISIONS.

19 (a) IN GENERAL.—Section 2642 of the Internal Rev20 enue Code of 1986 is amended by adding at the end the

21 following new subsection:

22 ‘‘(g) RELIEF PROVISIONS.—

23 ‘‘(1) RELIEF FOR LATE ELECTIONS.—

24 ‘‘(A) IN GENERAL.—The Secretary shall by

25 regulation prescribe such circumstances and
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1 procedures under which extensions of time will

2 be granted to make—

3 ‘‘(i) an allocation of GST exemption

4 described in paragraph (1) or (2) of sub5 section (b), and

6 ‘‘(ii) an election under subsection

7 (b)(3) or (c)(5) of section 2632.

8 Such regulations shall include procedures for

9 requesting comparable relief with respect to

10 transfers made before the date of enactment of

11 this paragraph.

12 ‘‘(B) BASIS FOR DETERMINATIONS.—In

13 determining whether to grant relief under this

14 paragraph, the Secretary shall take into ac15 count all relevant circumstances, including evi16 dence of intent contained in the trust instru17 ment or instrument of transfer and such other

18 factors as the Secretary deems relevant. For

19 purposes of determining whether to grant relief

20 under this paragraph, the time for making the

21 allocation (or election) shall be treated as if not

22 expressly prescribed by statute.

23 ‘‘(2) SUBSTANTIAL COMPLIANCE.—An alloca24 tion of GST exemption under section 2632 that

25 demonstrates an intent to have a zero inclusion ratio
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1 with respect to a transfer or a trust shall be deemed

2 to be an allocation of so much of the transferor’s un3 used GST exemption as produces, to the extent pos4 sible, a zero inclusion ratio. In determining whether

5 there has been substantial compliance, all relevant

6 circumstances shall be taken into account, including

7 evidence of intent contained in the trust instrument

8 or instrument of transfer and such other factors as

9 the Secretary deems relevant.’’.

10 (b) EFFECTIVE DATES.—

11 (1) RELIEF FOR LATE ELECTIONS.—Section

12 2642(g)(1) of the Internal Revenue Code of 1986

13 (as added by subsection (a)) shall apply to requests

14 pending on, or filed after, the date of the enactment

15 of this Act.

16 (2) SUBSTANTIAL COMPLIANCE.—Section

17 2642(g)(2) of such Code (as so added) shall take ef18 fect on the date of the enactment of this Act and

19 shall apply to allocations made prior to such date for

20 purposes of determining the tax consequences of

21 generation-skipping transfers with respect to which

22 the period of time for filing claims for refund has

23 not expired. No negative implication is intended with

24 respect to the availability of relief for late elections
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1 or the application of a rule of substantial compliance

2 prior to the enactment of this amendment.

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