66898 Federal Register / Vol. 60, No. 248 / Wednesday, December 27, 1995 / Rules and Regulations

DEPARTMENT OF HEALTH AND

HUMAN SERVICES

Food and Drug Administration

21 CFR Part 436

Tests and Methods of Assay of

Antibiotic and Antibiotic-Containing

Drugs

CFR Correction

In Title 21 CFR parts 300 to 499,

revised as of April 1, 1995, on pages 372

and 375, the equations following the

second table in both §§ 436.105 and

436.106 were misprinted. Both

denominators in each equation should

read ‘‘5’’ instead of ‘‘—5’’.

BILLING CODE 1505–01–D

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 26, 301, and 602

[TD 8644]

RIN 1545–AJ11; 1545–AL75; 1545–AO89

Generation-Skipping Transfer Tax

AGENCY: Internal Revenue Service,

Treasury.

ACTION: Final and temporary

regulations.

SUMMARY: This document contains final

generation-skipping transfer (GST) tax

regulations under chapter 13 of the

Internal Revenue Code (Code), as added

by section 1431 of the Tax Reform Act

of 1986. Changes to the applicable law

were made by the Tax Reform Act of

1986, the Technical and Miscellaneous

Revenue Act of 1988, and the Revenue

Reconciliation Act of 1989. The

regulations are necessary to provide

guidance to taxpayers so that they may

comply with chapter 13 of the Code.

EFFECTIVE DATE: December 27, 1995.

FOR FURTHER INFORMATION CONTACT:

James F. Hogan, (202) 622–3090 (not a

toll free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information

requirements contained in these final

regulations have been reviewed and

approved by the Office of Management

and Budget in accordance with the

Paperwork Reduction Act (44 U.S.C.

3507) under control numbers 1545–0985

(relating to §§ 26.2601–1 and 26.2662–2)

and 1545–1358 (relating to §§ 26.2632–

1, 26.2642–1, 26.2642–2, 26.2642–3,

26.2642–4 and 26.2652–2). All of these

paperwork requirements will be

consolidated under control number

1545–0985. Responses to this collection

of information are required to ensure the

proper collection of the generationskipping transfer tax.

An agency may not conduct or

sponsor, and a person is not required to

respond to, a collection unless the

collection of information displays a

valid control number.

The estimated burden per respondent

is 1 hour under control number 1545–

0985. The time estimates for the

reporting and recordkeeping

requirements under control number

1545–1358 are included in the estimates

of burden applicable to Forms 706,

706NA, 706GS(T), 706GS(D), 706GS(D–

1), and 709.

Comments concerning the accuracy of

this burden estimate and suggestions for

reducing this burden should be directed

to the Internal Revenue Service, Attn:

IRS Reports Clearance Officer T:FP,

Washington, DC 20224, and to the

Office of Management and Budget, Attn:

Desk Officer for the Department of

Treasury, Office of Information and

Regulatory Affairs, Washington, DC

20503.

Books or records relating to this

collection of information must be

retained as long as their contents may

become material in the administration

of any internal revenue law. Generally,

tax returns and tax return information

are confidential, as required by 26

U.S.C. 6103.

Background

On March 15, 1988, the IRS published

in the Federal Register a notice of

proposed rulemaking (53 FR 8469) by

cross reference to Temporary

Regulations published on the same date

in the Federal Register (53 FR 8441)

under §§ 2601 and 2662. Subsequently,

on December 24, 1992, the IRS

published a second notice of proposed

rulemaking (57 FR 61353) amending the

prior notice. Also, on December 24,

1992, the IRS published a notice of

proposed rulemaking in the Federal

Register (57 FR 61356) containing

proposed regulations under §§ 2611,

2612, 2613, 2632, 2641, 2642, 2652,

2653, 2654, and 2663. The IRS received

written and oral comments on the

proposed regulations and, on April 21,

1993, a public hearing was held. These

documents adopt final regulations with

respect to these notices of proposed

rulemaking.

The following is a discussion of the

more significant revisions that were

made.

Section 2601—Transitional Rules

Transfers After September 25, 1985 and

Before October 23, 1986

Section 26.2601–1(a)(2)(i), relating to

inter vivos transfers made after

September 25, 1985, and before October

23, 1986, clarifies that chapter 13

applies to inter vivos transfers that are

subject to chapter 12 even though a gift

tax is not actually paid because of, for

example, the marital deduction or the

unified credit.

Section 26.2601–1(a)(2)(ii) (which

treats inter vivos transfers made after

September 25, 1985, and before October

23, 1986, as if made on October 23,

1986) clarifies that the value of the

transferred property for purposes of

chapter 13 is determined as of the actual

transfer date rather than as of the

deemed transfer date of October 23,

1986.

Section 26.2601–1(a)(4) adds an

example illustrating that § 26.2601–

1(a)(2) does not apply to transfers made

under a revocable trust that becomes

irrevocable by reason of the grantor’s

death after September 25, 1985, but

before October 23, 1986. Those transfers

are not subject to chapter 13 because

they are in the nature of testamentary

transfers that occurred prior to October

23, 1986.

Section 26.2601–1(b)(1)(ii)(C) clarifies

that incidents of ownership in an

insurance policy that are relinquished

before September 25, 1985, are not to be

taken into account in determining

whether a trust is irrevocable for

purposes of § 26.2601–1(b)(1), which

exempts trusts that were irrevocable on

September 25, 1985, from the provisions

of chapter 13.

Under § 26.2601–1(b)(1)(iii)(A), a

qualified terminable interest property

(QTIP) trust that is grandfathered under

§ 26.2601–1(b)(1) is treated as if the

reverse QTIP election had been made

under section 2652(a)(3). Example 1 in

§ 26.2601–1(b)(1)(iii)(B) has been

revised to illustrate that the initial QTIP

election under section 2523(f) need not

be made before September 25, 1985,

provided that the trust was irrevocable

on that date. Further, § 26.2601–

1(b)(1)(v)(C) has been revised to provide

that in the case of a trust with respect

to which a reverse QTIP election is

deemed to have been made, the failure

to exercise the right of reimbursement

under section 2207A will not be treated

as a constructive addition to the trust.

This conforms the treatment of trusts

that are irrevocable on September 25,

1985, with the rule provided in

§ 26.2652–1(a)(3) which applies to trusts

created after September 25, 1985.
Federal Register / Vol. 60, No. 248 / Wednesday, December 27, 1995 / Rules and Regulations 66899

In § 26.2601–1(b)(2)(iv)(B), the phrase

‘‘or to a generation-skipping trust’’ has

been added to eliminate any implication

that the provision is limited to

situations involving direct skips. The

provision applies to all generationskipping transfers.

Section 26.2601–1(b)(3)(iii) applies

the transitional rules where the

decedent was under a mental disability

but had not been adjudged a mental

incompetent. This section has been

clarified to provide that any evidence

submitted to establish the decedent’s

state of incompetency is not conclusive

and is subject to examination. In

addition, an example has been added to

illustrate the transitional rules

applicable in the case of mental

incompetency.

Uniform Statutory Rule Against

Perpetuities

The notice of proposed rulemaking

published on December 24, 1992, (57 FR

61353) contained a proposed

modification to § 26.2601–

1(b)(1)(v)(B)(2). Section 26.2601–

1(b)(1)(v)(B)(2) provided that the

exercise of a nongeneral power of

appointment will not be treated as an

addition to a grandfathered GST trust if

the power is exercised in a manner that

may not postpone or suspend the

vesting, absolute ownership, or power of

alienation of a interest in property for a

period, measured from the date of

creation of the trust, extending beyond

any life in being at the date of creation

of the trust plus a period of 21 years

(perpetuities period).

The proposed modification to

§ 26.2601–1(b)(1)(v)(B)(2), which is

finalized in this document, provides

that the exercise of a nongeneral power

of appointment that validly postpones

or suspends the vesting, absolute

ownership, or power of alienation of an

interest in property for a term of years

that will not exceed 90 years (measured

from the date of creation of the trust)

will not be considered an exercise that

postpones vesting, etc., beyond the

perpetuities period. The modification

takes into account the fact that many

states have adopted the Uniform

Statutory Rule Against Perpetuities

(USRAP) which allows either a 90 year

perpetuities period or the common law

perpetuities period. Under § 26.2601–

1(b)(1)(v)(B)(2), as modified, the

nongeneral power may not be exercised

in a manner that postpones vesting, etc.,

for the longer of 90 years or the common

law period (lives in being plus 21 years).

The discussion in the preamble

published on December 24, 1992,

indicates that USRAP has a ‘‘wait and

see’’ aspect that is not appropriate for

GST purposes because it will be

necessary to determine the GST tax

consequences of distributions and

terminations at the time they occur.

Thus, the preamble stated that, in order

to comply with the regulation and avoid

a constructive addition, it must be clear

at the time the nongeneral power is

exercised that the exercise may not

postpone or suspend vesting, etc.,

beyond either lives in being plus 21

years or 90 years (but not the longer of

the two periods). A commentator has

pointed out that the USRAP invalidates

any attempt to exercise a power for the

longer of the two periods. Under the

USRAP, it will be clear at the time the

nongeneral power is exercised that the

exercise may not postpone or suspend

vesting, etc., beyond one of the two

periods (but not both). Under the

USRAP, the common law period (lives

in being plus 21 years) is imposed in the

event that the power holder exercises

the power in a manner that attempts to

suspend or postpone vesting, etc., for

the longer of the two periods. Although

the preamble published on December

24, 1992, may have been misleading in

referring to a ‘‘wait and see’’ aspect of

USRAP, the modification to § 26.2601–

1(b)(1)(v)(B)(2) is not affected.

Section 2611 et. seq.—GST Substantive

Rules

Definition of Generation-Skipping

Transfers

Section 26.2611–1 has been revised to

clarify that, in determining whether an

event is subject to the GST tax, reference

must be made to the most recent transfer

that was subject to Federal estate or gift

tax. This is because the most recent

transfer that was subject to estate or gift

tax establishes the identity of the

transferor, which in turn determines the

identity of the skip persons and nonskip persons.

Definitions

Section 26.2612–1(a)(2)(i) of the

proposed regulations provides generally

that, for purposes of determining

whether a transfer constitutes a direct

skip, the generation assignment of a

person who would otherwise be a skip

person is redetermined by disregarding

the intervening generation, if certain

individuals have died prior to the

transfer (e.g., a predeceased child of the

transferor). The section has been

modified to provide that, if an

individual who is a member of the

intervening generation dies no later than

90 days after the transfer, the deceased

individual is treated as having

predeceased the transferor, if the

governing instrument or applicable state

law provides for such treatment.

Section 26.2612–1(a)(2)(ii) has been

added to provide that, if a transferor

makes an addition to an existing trust

after the death of an individual

described in paragraph (a)(2)(i) of that

section (i.e., an individual in the

intervening generation), the additional

property is treated as being held in a

separate trust for purposes of chapter

13.

Section 2612(a)(1) defines the term

taxable termination to mean the

termination of an interest in property

held in trust unless, among other things,

at no time after such termination may a

distribution (including distributions on

termination) be made from the trust to

a skip person. Section 26.2612–

1(b)(1)(iii), as proposed, has been

revised to provide that, for purposes of

applying this rule, potential

distributions to skip persons are to be

disregarded if the probability of

occurrence is so remote as to be

negligible. A similar rule has been

applied to § 26.2612–1(d)(2), regarding

when a trust is considered a skip

person. The probability that a

distribution will occur is so remote as

to be negligible only if it can be

ascertained by actuarial standards that

there is less than a 5 percent probability

that the distribution will occur.

Section 26.2612–1(c)(2) has been

added to clarify that the look-through

rule in section 2651(e)(2) does not apply

for purposes of determining whether a

transfer from one trust to another trust

is a taxable distribution. Thus, the

transfer is treated as having been made

to the recipient trust rather than to the

beneficiaries of that trust. Accordingly,

a transfer is a taxable distribution only

if the recipient trust itself is a skip

person.

Section 26.2612–1(e)(3) has been

added to provide that, in determining

whether a trust is a skip person, trust

interests disclaimed pursuant to a

qualified disclaimer described in

section 2518 are not taken into account.

Example 3 has been added to

§ 26.2612–1(f) to illustrate that a transfer

to a trust pursuant to which a

beneficiary who is a skip person has a

withdrawal power is not a direct skip

unless the trust is a skip person.

Example 9 has been added to

§ 26.2612–1(f) to illustrate that a taxable

termination may occur upon the

distribution of the entire trust property

(less amounts retained to pay a resulting

GST tax and administration expenses).

Example 14 contained in § 26.2612–

1(f) of the proposed regulations

illustrates that an individual is not

treated as having an interest in a trust
66900 Federal Register / Vol. 60, No. 248 / Wednesday, December 27, 1995 / Rules and Regulations

for purposes of Chapter 13, if the

individual’s support obligation could be

satisfied at the discretion of the trustee.

This example has been renumbered as

Example 15 and has been clarified to

provide that an individual will have an

interest in the trust if the trustee is

required to make distributions for the

beneficiary’s support, in satisfaction of

the individual’s support obligation.

Allocation of GST Exemption

Under § 26.2632–1(b)(2)(ii)(A) of the

proposed regulations, a late allocation of

GST exemption is effective on the date

the Form 709 reporting the allocation is

filed, and is deemed to precede in point

of time any taxable event occurring on

that date. This section has been revised

to specify that the Form 709 is treated

as filed on the date it is mailed to the

appropriate IRS Service Center. Further,

the late allocation may be made on a

timely filed Form 709 reporting another

transfer.

Section 26.2632–1(b)(2)(ii)(B) has

been added to clarify how the GST

exemption allocated on a Federal gift

tax return (Form 709) is to be

apportioned in the event that the

amount allocated on the return exceeds

the value of the transfers reported on the

return.

Example 4 of § 26.2632–1(b)(2)(iii) of

the proposed regulations has been

revised to better illustrate the effective

date of a late allocation of GST

exemption.

Example 5 of § 26.2632–1(b)(2)(iii)

has been added to illustrate the

automatic allocation of GST exemption

to inter vivos direct skips in situations

where split gift treatment is elected on

an initial gift tax return filed after its

due date.

Section 26.2632–1(d)(1) has been

revised to provide that a late allocation

of GST exemption made by an executor

with respect to an inter vivos transfer

not included in the gross estate, is

effective as of the date the allocation is

filed. This rule does not apply to any

automatic allocation under section

2632(b)(1). This revision conforms the

regulation to section 2642(b)(3).

Estate Tax Inclusion Period

As proposed, § 26.2632–1(c)(2)(ii)

provided that an estate tax inclusion

period (ETIP) exists during the period in

which the transferred property would

have been includible in the transferor’s

gross estate had the transferor retained

an interest held by the transferor’s

spouse, but only to the extent the

spouse acquired the interest from the

transferor in an inter vivos transfer that

was not included in the transferor’s

taxable gifts or for which a deduction

was allowed under section 2523.

Commentators stated that there was no

support in the statute for this spousal

rule, and any such rule would require

a legislative change. The final

regulations eliminate this spousal rule

and Example 5 of § 26.2632–1(c)(5).

Section 26.2632–1(c)(2)(ii)(A) has

been added to provide that the ETIP

rules do not apply when the possibility

that the property will be included in the

gross estate of the transferor (or the

transferor’s spouse) is so remote as to be

negligible.

Further, § 26.2632–1(c)(2)(ii)(B) has

been added to provide that transferred

property will not be treated as being

subject to inclusion in the transferor’s

spouse’s gross estate, and thus, subject

to an ETIP, where the only power

possessed by the spouse is a right to

withdraw no more than the greater of 5

percent or $5,000 of the trust’s corpus

and the withdrawal right terminates

within 60 days of the transfer to the

trust.

Section 26.2632–1(c)(5) Example 3, of

the proposed regulations illustrates that

if a transferor’s spouse elects giftsplitting treatment with respect to the

transferor’s gift that is subject to an

ETIP, the spouse is treated as the

transferor of one-half of the gift. The

example has been expanded to illustrate

that, since the spouse’s deemed transfer

is subject to an ETIP, if the spouse dies

prior to the termination of the trust, the

spouse’s executor may allocate GST

exemption to the trust. However, the

allocation will not be effective until the

ETIP terminates on the transferor’s

death.

Erroneous Allocations

Under the proposed regulations,

allocations in excess of the amount of

the property transferred are void. This

treatment has been expanded under the

final regulations. Thus, any allocation to

a trust that has no GST potential at the

time of the allocation, with respect to

the transferor for whom the allocation is

made, is also void. This provision is

intended to prevent the wasting of GST

exemption because of an erroneous

allocation with respect to a testamentary

or inter vivos transfer. A trust will have

no GST potential only if there is no

possibility that a GST will be made from

the trust with respect to the transferor.

Determination of Applicable Fraction

Section 26.2642–1(b)(2) of the

proposed regulations provided rules for

determining the inclusion ratio with

respect to a trust subject to an ETIP

where GSTs are made from the trust

during the ETIP. Comments were

received that the rules were unclear

regarding whether an ineffective

allocation, i.e., an allocation made prior

to any distributions or terminations,

would apply in determining the amount

of the transferor’s unused GST

exemption, or whether such an

allocation could be modified prior to an

ETIP termination. In response to the

comments, § 26.2632–1(c)(1) (providing

rules for the allocation of exemption

with respect to a trust subject to an

ETIP) and § 26.2642–1(b)(2) clarify that

an allocation made to a trust subject to

an ETIP prior to any distribution or

termination is not subject to

modification or revocation. However,

the allocation will not be effective, i.e.,

the allocation does not operate to fix the

inclusion ratio of the trust, at the time

it is made. Rather, the allocation

becomes effective as of the date of a

subsequent distribution or termination.

Section 26.2632–1(c)(5) Example 2,

illustrates this point.

Section 26.2642–2 of the proposed

regulations provides valuation rules for

determining the denominator of the

applicable fraction under section 2642.

Section 26.2642–2(a)(1) of the final

regulations specifies that, in the case of

a timely allocation of GST exemption

with respect to an inter vivos transfer,

the denominator of the applicable

fraction is the fair market value of the

transferred property, as finally

determined for gift tax purposes.

Section 26.2642–2(b)(1) of the

proposed regulations provides special

rules for determining the denominator

of the applicable fraction in situations

involving property subject to the special

valuation rules contained in section

2032A. Under the proposed regulations,

the special use value of the property

could only be used in determining the

applicable fraction if the property was

transferred in a direct skip. Thus, a

generation-skipping trust to which

section 2032A property was transferred

in a transfer that was not a direct skip

would not receive the benefit of the

favorable valuation rules of section

2032A in determining the applicable

fraction with respect to the trust.

Comments stated that the proposed

regulation was inconsistent with section

2642(b), which provides that the chapter

11 value must be used to determine the

applicable fraction in the case of a

testamentary transfer. Under the final

regulations, the section 2032A value of

property is to be used to determine the

applicable fraction for a direct skip

transfer and for a generation-skipping

trust created in a transfer other than a

direct skip.

In the event that additional estate tax

is imposed under section 2032A(c) with

respect to the property, then the
Federal Register / Vol. 60, No. 248 / Wednesday, December 27, 1995 / Rules and Regulations 66901

applicable fraction is redetermined as of

the transferor’s date of death. Thus, the

GST tax liability with respect to any

direct skip, taxable termination, or

taxable distribution occurring prior to

the recapture event would be

recomputed based on the redetermined

applicable fraction, and an additional

GST tax would be due. The taxation of

any future GST transfers would also be

based on the redetermined applicable

fraction.

Sections 26.2642–2(b) (2) and (3) of

the proposed regulations contain special

rules for determining the denominator

of the applicable fraction in situations

involving residuary and pecuniary

payments. Generally, in the case of a

residual GST after the payment of a

pecuniary amount, the denominator of

the applicable fraction will be the estate

tax value of the total assets available to

satisfy the pecuniary payment less the

amount of the pecuniary payment,

provided the pecuniary payment carries

‘‘appropriate interest’’ as defined in

§ 26.2642–2(b)(4). Under § 26.2642–

2(b)(4)(ii), the payment need not carry

appropriate interest if, inter alia, the

payment is irrevocably ‘‘set aside’’

within 15 months of the transferor’s

death. The final regulations clarify that

this exception to the appropriate

interest requirement applies only if the

entire payment is set aside. Further, the

payment is treated as set aside if the

amount is segregated and held in a

separate account pending distribution.

Finally, under the proposed regulation,

the appropriate interest requirement can

be satisfied if a pro rata share of estate

income is allocated to the pecuniary

bequest. The final regulations clarify

that the payment of income may be

allocated pursuant to the terms of the

governing instrument or applicable local

law.

Section 26.2642–4(a)(3) of the

proposed regulations addresses a

situation where a lifetime allocation is

made with respect to a trust when the

trust was not subject to an ETIP, and the

trust is subsequently included in the

transferor’s gross estate. The regulation

has been revised to provide that, if

additional GST exemption is allocated

to the trust, the nontax portion of the

trust is determined immediately after

the date of the transferor’s death. Also,

if additional GST exemption is not

allocated to the trust by the transferor’s

executor, the applicable fraction does

not change, if the trust was not

otherwise subject to an ETIP at the time

the previous allocation of GST

exemption was made. Further, where

such property is included in the gross

estate, the denominator of the

applicable fraction is reduced to reflect

any federal or state estate or inheritance

tax paid by the trust.

Definition of Transferor

Section 26.2652–1(a)(1) of the

proposed regulations, defining

transferor, has been revised to specify

that a surviving spouse is treated as the

transferor of a qualified domestic trust

(QDOT) described in section 2056A that

is included in the surviving spouse’s

gross estate for federal estate tax

purposes, assuming the trust is not

subject to a reverse QTIP election under

section 2652(a)(3). The surviving spouse

is also the transferor of any QDOT

created by the surviving spouse under

section 2056(d)(2)(B).

Section 26.2652–1(a)(4), as proposed,

provided that the creator of a special

power of appointment will be treated as

making a transfer subject to estate or gift

tax (and thus be considered a transferor)

if the holder of the power exercised the

power in a manner that may postpone

vesting, etc., of the property subject to

the power beyond the permissible

perpetuities period. This result is

inconsistent with section 2041(a)(3),

which treats the holder of the power as

making a transfer under these

circumstances. Accordingly, the

regulation has been revised to provide

that the holder of the power will be

treated as making a taxable transfer, if

the holder exercises the power in the

manner prescribed.

Section 26.2652–1(a)(5) has been

added to specify that where a donor’s

spouse consents to have the donor’s gift

treated as made one-half by the spouse,

then for purposes of chapter 13, the

spouse is treated as the transferor of

one-half of the property transferred by

the donor. Thus, if a donor transfers

property to a trust and retains a

qualified interest as defined in section

2702(b), with the remainder to a

grandchild, a consenting spouse would

be treated as the transferor of one-half

the entire property. It was suggested that

the spouse should only be treated as the

transferor of that portion of the trust

corresponding to one-half of the

actuarial value of the interest passing to

the grandchild, since under section

2513, only one half the gift to the

grandchild may be treated as made by

the consenting spouse. However,

treating the consenting spouse as the

transferor of one-half of the entire trust

is consistent with the general treatment

accorded other split-interest transfers.

For example, if a transferor transferred

property in trust retaining an interest

that qualified under section 2702(b),

with the remainder to the transferor’s

grandchild, the transferor would be

considered the transferor of the entire

trust for purposes of chapter 13,

notwithstanding that, from a technical

standpoint, only the actuarial value of

the gift to the grandchild is subject to

gift tax at the time of the transfer.

Example 8 in § 26.2652–1(a)(6) has

been added illustrating that a surviving

spouse will not be treated as making a

contribution to a QTIP trust that is

included in the spouse’s gross estate

and is subject to a reverse QTIP election,

where the spouse directs in the will that

the estate tax generated by the inclusion

of the trust is to be paid from the

spouse’s probate estate.

Separate Shares Treated as Separate

Trusts

Section 26.2654–1 of the proposed

regulations provides rules under which

‘‘separate shares’’ of a single trust that

satisfy the requirements of the

regulations will be recognized as

separate trusts for GST purposes.

Under the proposed regulations, a

mandatory payment of a pecuniary

amount is treated as a separate share of

a trust (and thus, a separate trust for

GST purposes) if certain conditions are

satisfied. The section is clarified to

specify that a mandatory payment is a

payment that is nondiscretionary and

noncontingent; i.e., the payment must

be made in all events.

A sentence was added to Example 3,

now contained in § 26.2654–1(a)(5), to

clarify that, where a decedent’s probate

estate pours over to a revocable trust,

and then amounts are distributed

pursuant to the terms of the trust, the

distributions will be treated as separate

shares for purposes of chapter 13.

Example 4, now contained in

§ 26.2654–1(a)(5), has been revised to

specify that the bequest of a pecuniary

amount payable in kind is not treated as

a separate share of the trust, since,

under the facts presented, neither the

trust nor local law requires that the

assets distributed in satisfaction of the

bequest fairly reflect net appreciation

and depreciation. This is the result

regardless of whether the assets are

distributed within 15 months of the

transferor’s death.

Comments received suggested that the

regulations should allow separate trust

treatment whenever a single inter vivos

trust was recognized as separate trusts

under local law. For example, an inter

vivos trust provides income to child for

life, but when each grandchild reaches

age 35, a separate trust is to be

established for the child, the grandchild,

and the grandchild’s issue. Comments

suggested that the Service should

recognize each trust established when a

grandchild reaches age 35 as a separate

trust, and allow a late allocation of GST
66902 Federal Register / Vol. 60, No. 248 / Wednesday, December 27, 1995 / Rules and Regulations

exemption specifically to that trust

when severance occurs.

This suggestion was rejected.

Generally, the adoption of this approach

would effectively allow the allocation of

GST exemption to specific distributions

from a GST trust, rather than to the

entire trust. This result would be

contrary to the clear language of the

statute. See, e.g., sections 2642(a)(1)(A)

and (a)(2).

Division of a Single Trust Into Separate

Trusts

Under § 26.2654–1(c) of the proposed

regulations, a testamentary trust could

be severed into several parts, provided

the severance was commenced prior to

the filing of the estate tax return.

Further, the new trusts created pursuant

to the severance had to be identical to

the old trusts. For example, a

testamentary trust providing for income

to spouse, remainder to be divided

equally between child and grandchild

could only be severed into two trusts

both providing income to spouse with

the remainder to be divided between

child and grandchild. Finally, an inter

vivos trust could not be severed unless

it consisted of separate shares, or

different transferors had contributed to

the trust.

The regulation has been clarified to

specify that the division of a single trust

that is included in the transferor’s gross

estate will be recognized if either: (1)

The single trust consists of separate

shares and is thus, treated as separate

trusts; or (2) the single trust, although

not consisting of separate shares, is

severed into separate trusts pursuant to

a direction in the governing instrument

providing that the trust is to be divided

into separate trusts on the transferor’s

death; or (3) the governing instrument

does not require or direct severance but

the trust is severed pursuant to the

discretionary authority of the trustee

granted under the governing instrument

or local law.

The final regulations provide that the

trusts resulting from the severance of a

single testamentary trust need not be

identical. Thus, if the trust provides

income to spouse, remainder to child

and grandchild, the trust may be

severed to create two trusts, one with

income to spouse, remainder to child

and a second with income to spouse

remainder to grandchild. This result

could be achieved through proper estate

planning in any event. However, the

regulations make it clear that the

resulting trusts must provide for the

same succession of interests as provided

for under the original trusts. Thus, a

trust providing for an income interest to

a child, with remainder to a grandchild,

could not be divided into one trust for

the child (equal in value to the child’s

income interest) and another for the

grandchild.

The proposed regulations provided

that the new trusts must be funded with

a fractional share of each and every

asset held by the original single trust.

The provision has been revised to

provide that the new trusts may also be

funded on a nonpro rata basis, based on

the fair market value of the assets

selected on the date of severance. Thus,

the executor or trustee may select the

assets with which to fund each trust,

and need not fractionalize each asset.

An example has been added to

illustrate that, if a revocable trust

included in the transferor’s gross estate

is, under the terms of the trust, divided

into multiple trusts on the transferor’s

death, then each trust established will

be treated as a separate trust for GST

purposes.

Due Date of Return

New § 26.2662–1(d)(2) has been

added to provide that the due date of

the return with respect to a taxable

termination subject to an election under

section 2624(c) (relating to alternate

valuation in accordance with section

2032) is April 15th of the following year

in which the taxable termination

occurred or on or before the 15th day of

the tenth month following the month in

which the death that resulted in the

taxable termination occurred, whichever

is later.

Application of Chapter 13 to

Nonresident Aliens

Section 2663(2) requires that the

Commissioner prescribe regulations,

consistent with the provisions of

chapters 11 and 12, providing for the

application of the GST tax to a

nonresident alien (NRA). In general,

under § 26.2663–2(b) as proposed, the

GST tax applied to inter vivos and

testamentary direct skip transfers by a

NRA, to the extent that the transferred

property was U.S. situs property such

that the transfer was subject to a gift tax

(in the case of inter vivos transfers) or

an estate tax (in the case of testamentary

transfers). Similarly, in the case of

transfers in trust, chapter 13 applied to

taxable terminations and distributions

to the extent the initial transfer to the

trust (whether inter vivos or

testamentary) consisted of U.S. situs

property, such that the initial transfer

was subject to the gift or estate tax. This

was the case regardless of the situs of

the property at the time of the actual

distribution or termination and

regardless of the residency or

citizenship of the skip person receiving

the beneficial interest or property.

Under § 26.2663–2(c) as proposed, if

the property involved in a generationskipping transfer was not situated in the

U.S. at the time of the initial transfer,

the generation-skipping transfer was

still subject to the GST tax if: (1) At the

time of the direct skip, taxable

termination or distribution, the property

passes to a skip person who is a U.S.

resident or citizen; and (2) at the time

of the initial transfer to the skip person

or trust, a lineal descendant of the

transferor, who is a lineal ancestor of

the skip person, was a resident or

citizen of the U.S. This rule applied

regardless of the situs of the property at

the time of the actual distribution or

termination. Section 26.2663–2(f) of the

proposed regulations provided for the

automatic allocation of a NRA’s

$1,000,000 GST exemption regardless of

whether the transfer was a direct skip.

Thus, the proposed regulations

subjected non-U.S. situs property to the

GST tax based on the status of the skip

person/recipient of the property at the

time the property was received, and the

status of the generation that was

skipped at the time of the initial transfer

to the trust or skip person.

Many comments were critical of this

approach. In general, these comments

emphasized that the estate and gift tax

provisions subject transfers by NRAs to

transfer tax based on the situs of the

property, not the status of the recipient.

Therefore, the proposed regulations

conflict with section 2663, which

provides that the regulations should be

consistent with the principles of

chapters 11 and 12 of the Internal

Revenue Code (Code). Further, the

commentators argued that treating a

NRA who transfers non-U.S. situs

property as a transferor for GST tax

purposes would conflict with the

definition of transferor under section

2652, since the transfer would not be

subject to estate or gift tax. Under

section 2652, an individual is a

transferor only to the extent the transfer

is subject to U.S. gift tax or estate tax.

The proposed regulations have been

revised to address these concerns. Thus,

the rules in the proposed regulations

applying chapter 13 to transfers of

property that were not subject to estate

or gift tax have been eliminated. Under

the final regulations, the application of

the GST tax will be limited to situations

where an estate or gift tax is imposed on

the property. Thus, the GST tax will

apply to inter vivos and testamentary

direct skip transfers by a NRA transferor

to the extent a gift tax is imposed on the

transfer (in the case of an inter vivos

transfer) or the transferred property is
Federal Register / Vol. 60, No. 248 / Wednesday, December 27, 1995 / Rules and Regulations 66903

included in the transferor’s gross estate

(in the case of a testamentary direct

skip). In the case of taxable terminations

and taxable distributions, chapter 13

will apply to the extent a gift tax was

imposed on the initial transfer to the

trust, or the property was included in

the transferor’s gross estate.

Accordingly, under the final regulations

(in the absence of a situation involving

an ETIP), the application of Chapter 13

is generally dependent on the situs of

the property at the time of the initial

transfer. The regulations contain special

rules for determining the applicable

fraction and inclusion ratio where a

trust is funded with both U.S. and

foreign situs property.

In general, the rules of § 26.2632–1

apply with respect to the allocation of

the exemption. However, the ETIP rule

provided in § 26.2632–1(c) applies only

if the property transferred by the NRA

is subsequently included in the

transferor’s gross estate. The final

regulations provide transitional relief

with respect to NRA’s who made GST

transfers and relied on the automatic

allocation rules in the proposed

regulations.

Special Analyses

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in EO

12866. Therefore, a regulatory

assessment is not required. It has also

been determined that section 553(b) of

the Administrative Procedure Act (5

U.S.C. chapter 5) and the Regulatory

Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and

therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to

section 7805(f) of the Internal Revenue

Code, the notice of proposed rulemaking

preceding these regulations was

submitted to the Small Business

Administration for comment on its

impact on small business.

Drafting Information. The principal

author of these regulations is James F.

Hogan, Office of the Chief Counsel, IRS.

Other personnel from the IRS and

Treasury Department participated in

their development.

List of Subjects

26 CFR Part 26

Estate taxes, Reporting and

recordkeeping requirements.

26 CFR Part 301

Employment taxes, Estate taxes,

Excise taxes, Gift taxes, Income taxes,

Penalties, Reporting and recordkeeping

requirements.

26 CFR part 602

Reporting and recordkeeping

requirements.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 26, 301,

and 602 are amended as follows:

Paragraph 1. Part 26 is revised to read

as follows:

PART 26—GENERATION-SKIPPING

TRANSFER TAX REGULATIONS

UNDER THE TAX REFORM ACT OF

1986

Sec.

26.2600–1 Table of contents.

26.2601–1 Effective dates.

26.2611–1 Generation-skipping transfer

defined.

26.2612–1 Definitions.

26.2613–1 Skip person.

26.2632–1 Allocation of GST exemption.

26.2641–1 Applicable rate of tax.

26.2642–1 Inclusion ratio.

26.2642–2 Valuation.

26.2642–3 Special rule for charitable lead

annuity trusts.

26.2642–4 Redetermination of applicable

fraction.

26.2642–5 Finality of inclusion ratio.

26.2652–1 Transferor defined; other

definitions.

26.2652–2 Special election for qualified

terminable interest property.

26.2653–1 Taxation of multiple skips.

26.2654–1 Certain trusts treated as separate

trusts.

26.2662–1 Generation-skipping transfer tax

return requirements.

26.2663–1 Recapture tax under section

2032A.

26.2663–2 Application of chapter 13 to

transfers by nonresidents not citizens of

the United States.

Authority: 26 U.S.C. 7805 and 26 U.S.C.

2663.

Section 26.2632–1 also issued under

26 U.S.C. 2632 and 2663.

Section 26.2642–4 also issued under

26 U.S.C. 2632 and 2663.

Section 26.2662–1 also issued under

26 U.S.C. 2662.

Section 26.2663–2 also issued under

26 U.S.C. 2632 and 2663.

§ 26.2600–1 Table of contents.

This section lists the captions that

appear in the regulations under sections

2601 through 2663.

§ 26.2601–1 Effective dates.

(a) Transfers subject to the generationskipping transfer tax.

(1) In general.

(2) Certain transfers treated as if made after

October 22, 1986.

(3) Certain trust events treated as if

occurring after October 22, 1986.

(4) Example.

(b) Exceptions.

(1) Irrevocable trusts.

(2) Transition rule for wills or revocable

trusts executed before October 22, 1986.

(3) Transition rule in the case of mental

incompetency.

(4) Exceptions to additions rule.

(c) Additional effective dates.

§ 26.2611–1 Generation-skipping transfer

defined.

§ 26.2612–1 Definitions.

(a) Direct skip.

(1) In general.

(2) Special rule for certain lineal

descendants.

(b) Taxable termination.

(1) In general.

(2) Partial termination.

(c) Taxable distribution.

(1) In general.

(2) Look-through rule not to apply.

(d) Skip person.

(e) Interest in trust.

(1) In general.

(2) Exceptions.

(3) Disclaimers.

(f) Examples.

§ 26.2613–1 Skip person.

§ 26.2632–1 Allocation of GST exemption.

(a) General rule.

(b) Lifetime allocations.

(1) Automatic allocation to direct skips.

(2) Allocation to other transfers.

(c) Special rules during an estate tax

inclusion period.

(1) In general.

(2) Estate tax inclusion period defined.

(3) Termination of an ETIP.

(4) Treatment of direct skips.

(5) Examples.

(d) Allocations after the transferor’s death.

(1) Allocation by executor.

(2) Automatic allocation after death.

§ 26.2641–1 Applicable rate of tax.

§ 26.2642–1 Inclusion ratio.

(a) In general.

(b) Numerator of applicable fraction.

(1) In general.

(2) GSTs occurring during an ETIP.

(c) Denominator of applicable fraction.

(1) In general.

(2) Zero denominator.

(3) Nontaxable gifts.

(d) Examples.

§ 26.2642–2 Valuation.

(a) Lifetime transfers.

(1) In general.

(2) Special rule for late allocations during

life.

(b) Transfers at death.

(1) In general.

(2) Special rule for pecuniary payments.

(3) Special rule for residual transfers after

payment of a pecuniary payment.

(4) Appropriate interest.

(c) Examples.

§ 26.2642–3 Special rule for charitable lead

annuity trusts.

(a) In general.

(b) Adjusted GST exemption defined.

(c) Example.
66904 Federal Register / Vol. 60, No. 248 / Wednesday, December 27, 1995 / Rules and Regulations

§ 26.2642–4 Redetermination of applicable

fraction.

(a) In general.

(1) Multiple transfers to a single trust.

(2) Consolidation of separate trusts.

(3) Property included in transferor’s gross

estate.

(4) Imposition of recapture tax under

section 2032A.

(b) Examples.

§ 26.2642–5 Finality of inclusion ratio.

(a) Direct skips.

(b) Other GSTs.

§ 26.2652–1 Transferor defined; other

definitions.

(a) Transferor defined.

(1) In general.

(2) Transfers subject to Federal estate or

gift tax.

(3) Special rule for certain QTIP trusts.

(4) Exercise of certain nongeneral powers

of appointment.

(5) Split-gift transfers.

(6) Examples.

(b) Trust defined.

(1) In general.

(2) Examples.

(c) Trustee defined.

(d) Executor defined.

(e) Interest in trust.

§ 26.2652–2 Special election for qualified

terminable interest property.

(a) In general.

(b) Time and manner of making election.

(c) Transitional rule.

(d) Examples.

§ 26.2653–1 Taxation of multiple skips.

(a) General rule.

(b) Examples.

§ 26.2654–1 Certain trusts treated as

separate trusts.

(a) Single trust treated as separate trusts.

(1) Substantially separate and independent

shares.

(2) Multiple transferors with respect to a

single trust.

(3) Severance of a single trust.

(4) Allocation of exemption.

(5) Examples.

(b) Division of a trust included in the gross

estate.

(1) In general.

(2) Special rule.

(3) Allocation of exemption.

(4) Example.

§ 26.2662–1 Generation-skipping transfer

tax return requirements.

(a) In general.

(b) Form of return.

(1) Taxable distributions.

(2) Taxable terminations.

(3) Direct skip.

(c) Person liable for tax and required to

make return.

(1) In general.

(2) Special rule for direct skips occurring

at death with respect to property held in trust

arrangements.

(3) Limitation on personal liability of

trustee.

(4) Exceptions.

(d) Time and manner of filing return.

(1) In general.

(2) Exceptions for alternative valuation of

taxable termination.

(e) Place for filing returns.

(f) Lien on property.

§ 26.2663–1 Recapture tax under section

2032A.

§ 26.2663–2 Application of chapter 13 to

transfers by nonresidents not citizens of the

United States.

(a) In general.

(b) Transfers subject to Chapter 13.

(1) Direct skips.

(2) Taxable distributions and taxable

terminations.

(c) Trusts funded in part with property

subject to Chapter 13 and in part with

property not subject to Chapter 13.

(1) In general.

(2) Nontax portion of the trust.

(3) Special rule with respect to estate tax

inclusion period.

(d) Examples.

(e) Transitional rule for allocations for

transfers made before December 27, 1995.

26.2601–1 Effective dates.

(a) Transfers subject to the generationskipping transfer tax—(1) In general.

Except as otherwise provided in this

section, the provisions of chapter 13 of

the Internal Revenue Code of 1986

(Code) apply to any generation-skipping

transfer (as defined in section 2611)

made after October 22, 1986.

(2) Certain transfers treated as if made

after October 22, 1986. Solely for

purposes of chapter 13, an inter vivos

transfer is treated as if it were made on

October 23, 1986, if it was—

(i) Subject to chapter 12 (regardless of

whether a tax was actually incurred or

paid); and

(ii) Made after September 25, 1985,

but before October 23, 1986. For

purposes of this paragraph, the value of

the property transferred shall be the

value of the property on the date the

property was transferred.

(3) Certain trust events treated as if

occurring after October 22, 1986. For

purposes of chapter 13, if an inter vivos

transfer is made to a trust after

September 25, 1985, but before October

23, 1986, any subsequent distribution

from the trust or termination of an

interest in the trust that occurred before

October 23, 1986, is treated as occurring

immediately after the deemed transfer

on October 23, 1986. If more than one

distribution or termination occurs with

respect to a trust, the events are treated

as if they occurred on October 23, 1986,

in the same order as they occurred. See

paragraph (b)(1)(iv)(B) of this section for

rules determining the portion of

distributions and terminations subject to

tax under chapter 13. This paragraph

(a)(3) does not apply to transfers to

trusts not subject to chapter 13 by

reason of the transition rules in

paragraphs (b) (2) and (3) of this section.

The provisions of this paragraph (a)(3)

do not apply in determining the value

of the property under chapter 13.

(4) Example. The following example

illustrates the principle that paragraph

(a)(2) of this section is not applicable to

transfers under a revocable trust that

became irrevocable by reason of the

transferor’s death after September 25,

1985, but before October 23, 1986:

Example. T created a revocable trust on

September 30, 1985, that became irrevocable

when T died on October 10, 1986. Although

the trust terminated in favor of a grandchild

of T, the transfer to the grandchild is not

treated as occurring on October 23, 1986,

pursuant to paragraph (a)(2) of this section

because it is not an inter vivos transfer

subject to chapter 12. The transfer is not

subject to chapter 13 because it is in the

nature of a testamentary transfer that

occurred prior to October 23, 1986.

(b) Exceptions—(1) Irrevocable

trusts—(i) In general. The provisions of

chapter 13 do not apply to any

generation-skipping transfer under a

trust (as defined in section 2652(b)) that

was irrevocable on September 25, 1985.

The rule of the preceding sentence does

not apply to a pro rata portion of any

generation-skipping transfer under an

irrevocable trust if additions are made to

the trust after September 25, 1985. See

paragraph (b)(1)(iv) of this section for

rules for determining the portion of the

trust that is subject to the provisions of

chapter 13.

(ii) Irrevocable trust defined—(A) In

general. Unless otherwise provided in

either paragraph (b)(1)(ii) (B) or (C) of

this section, any trust (as defined in

section 2652(b)) in existence on

September 25, 1985, is considered an

irrevocable trust.

(B) Property includible in the gross

estate under section 2038. For purposes

of this chapter a trust is not an

irrevocable trust to the extent that, on

September 25, 1985, the settlor held a

power with respect to such trust that

would have caused the value of the trust

to be included in the settlor’s gross

estate for Federal estate tax purposes by

reason of section 2038 (without regard

to powers relinquished before

September 25, 1985) if the settlor had

died on September 25, 1985. A trust is

considered subject to a power on

September 25, 1985, even though the

exercise of the power was subject to the

precedent giving of notice, or even

though the exercise could take effect

only on the expiration of a stated

period, whether or not on or before

September 25, 1985, notice had been

given or the power had been exercised.
Federal Register / Vol. 60, No. 248 / Wednesday, December 27, 1995 / Rules and Regulations 66905

A trust is not considered subject to a

power if the power is, by its terms,

exercisable only on the occurrence of an

event or contingency not subject to the

settlor’s control (other than the death of

the settlor) and if the event or

contingency had not in fact taken place

on September 25, 1985.

(C) Property includible in the gross

estate under section 2042. A policy of

insurance on an individual’s life that is

treated as a trust under section 2652(b)

is not considered an irrevocable trust to

the extent that, on September 25, 1985,

the insured possessed any incident of

ownership (as defined in § 20.2042–1(c)

of this chapter, and without regard to

any incidents of ownership relinquished

before September 25, 1985), that would

have caused the value of the trust, (i.e.,

the insurance proceeds) to be included

in the insured’s gross estate for Federal

estate tax purposes by reason of section

2042, if the insured had died on

September 25, 1985.

(D) Examples. The following

examples illustrate the application of

this paragraph (b)(1):

Example 1. Section 2038 applicable. On

September 25, 1985, T, the settlor of a trust

that was created before September 25, 1985,

held a testamentary power to add new

beneficiaries to the trust. T held no other

powers over any portion of the trust. The

testamentary power held by T would have

caused the trust to be included in T’s gross

estate under section 2038 if T had died on

September 25, 1985. Therefore, the trust is

not an irrevocable trust for purposes of this

section.

Example 2. Section 2038 not applicable

when power held by a person other than

settlor. On September 25, 1985, S, the spouse

of the settlor of a trust in existence on that

date, had an annual right to withdraw a

portion of the principal of the trust. The trust

was otherwise irrevocable on that date.

Because the power was not held by the

settlor of the trust, it is not a power described

in section 2038. Thus, the trust is considered

an irrevocable trust for purposes of this

section.

Example 3. Section 2038 not applicable. In

1984, T created a trust and retained the right

to expand the class of remaindermen to

include any of T’s afterborn grandchildren.

As of September 25, 1985, all of T’s

grandchildren were named remaindermen of

the trust. Since the exercise of T’s power was

dependent on there being afterborn

grandchildren who were not members of the

class of remaindermen, a contingency that

did not exist on September 25, 1985, the trust

is not considered subject to the power on

September 25, 1985, and is an irrevocable

trust for purposes of this section. The result

is not changed even if grandchildren are born

after September 25, 1985, whether or not T

exercises the power to expand the class of

remaindermen.

Example 4. Section 2042 applicable. On

September 25, 1985, T purchased an

insurance policy on T’s own life and

designated child, C, and grandchild, GC, as

the beneficiaries. T retained the power to

obtain from the insurer a loan against the

surrender value of the policy. T’s insurance

policy is a trust (as defined in section

2652(b)) for chapter 13 purposes. The trust is

not considered an irrevocable trust because,

on September 25, 1985, T possessed an

incident of ownership that would have

caused the value of the policy to be included

in T’s gross estate under section 2042 if T

had died on that date.

Example 5. Trust partially irrevocable. In

1984, T created a trust naming T’s

grandchildren as the income and remainder

beneficiaries. T retained the power to revoke

the trust as to one-half of the principal at any

time prior to T’s death. T retained no other

powers over the trust principal. T did not die

before September 25, 1985, and did not

exercise or release the power before that date.

The half of the trust not subject to T’s power

to revoke is an irrevocable trust for purposes

of this section.

(iii) Trust containing qualified

terminable interest property—(A) In

general. For purposes of chapter 13, a

trust described in paragraph (b)(1)(ii) of

this section that holds qualified

terminable interest property by reason

of an election under section 2056(b)(7)

or section 2523(f) (made either on,

before or after September 25, 1985) is

treated in the same manner as if the

decedent spouse or the donor spouse (as

the case may be) had made an election

under section 2652(a)(3). Thus, transfers

from such trusts are not subject to

chapter 13, and the decedent spouse or

the donor spouse (as the case may be)

is treated as the transferor of such

property. The rule of this paragraph

(b)(1)(iii) does not apply to that portion

of the trust that is subject to chapter 13

by reason of an addition to the trust

occurring after September 25, 1985. See

§ 26.2652–2(a) for rules where an

election under section 2652(a)(3) is

made. See § 26.2652–2(c) for rules

where a portion of a trust is subject to

an election under section 2652(a)(3).

(B) Examples. The following

examples illustrate the application of

this paragraph (b)(1)(iii):

Example 1. QTIP election made after

September 25, 1985. On March 28, 1985, T

established a trust. The trust instrument

provided that the trustee must distribute all

income annually to T’s spouse, S, during S’s

life. Upon S’s death, the remainder is to be

distributed to GC, the grandchild of T and S.

On April 15, 1986, T elected under section

2523(f) to treat the property in the trust as

qualified terminable interest property. On

December 1, 1987, S died and soon thereafter

the trust assets were distributed to GC.

Because the trust was irrevocable on

September 25, 1985, the transfer to GC is not

subject to tax under chapter 13. T is treated

as the transferor with respect to the transfer

of the trust assets to GC in the same manner

as if T had made an election under section

2652(a)(3) to reverse the effect of the section

2523(f) election for chapter 13 purposes.

Example 2. Section 2652(a)(3) election

deemed to have been made. Assume the

same facts as in Example 1, except the trust

instrument provides that after S’s death all

income is to be paid annually to C, the child

of T and S. Upon C’s death, the remainder

is to be distributed to GC. C died on October

1, 1992, and soon thereafter the trust assets

are distributed to GC. Because the trust was

irrevocable on September 25, 1985, the

termination of C’s interest is not subject to

chapter 13.

(iv) Additions to irrevocable trusts—

(A) In general. If an addition is made

after September 25, 1985, to an

irrevocable trust which is excluded from

chapter 13 by reason of paragraph (b)(1)

of this section, a pro rata portion of

subsequent distributions from (and

terminations of interests in property

held in) the trust is subject to the

provisions of chapter 13. If an addition

is made, the trust is thereafter deemed

to consist of two portions, a portion not

subject to chapter 13 (the non-chapter

13 portion) and a portion subject to

chapter 13 (the chapter 13 portion), each

with a separate inclusion ratio (as

defined in section 2642(a)). The nonchapter 13 portion represents the value

of the assets of the trust as it existed on

September 25, 1985. The applicable

fraction (as defined in section

2642(a)(2)) for the non-chapter 13

portion is deemed to be 1 and the

inclusion ratio for such portion is 0. The

chapter 13 portion of the trust

represents the value of all additions

made to the trust after September 25,

1985. The inclusion ratio for the chapter

13 portion is determined under section

2642. This paragraph (b)(1)(iv)(A)

requires separate portions of one trust

only for purposes of determining

inclusion ratios. For purposes of chapter

13, a constructive addition under

paragraph (b)(1)(v) of this section is

treated as an addition. See paragraph

(b)(4) of this section for exceptions to

the additions rule of this paragraph

(b)(1)(iv). See § 26.2654–1(a)(2) for rules

treating additions to a trust by an

individual other than the initial

transferor as a separate trust for

purposes of chapter 13.

(B) Terminations of interests in and

distributions from trusts. Where a

termination or distribution described in

section 2612 occurs with respect to a

trust to which an addition has been

made, the portion of such termination or

distribution allocable to the chapter 13

portion is determined by reference to

the allocation fraction, as defined in

paragraph (b)(1)(iv)(C) of this section. In

the case of a termination described in

section 2612(a) with respect to a trust,

the portion of such termination that is
66906 Federal Register / Vol. 60, No. 248 / Wednesday, December 27, 1995 / Rules and Regulations

subject to chapter 13 is the product of

the allocation fraction and the value of

the trust (to the extent of the terminated

interest therein). In the case of a

distribution described in section 2612(b)

from a trust, the portion of such

distribution that is subject to chapter 13

is the product of the allocation fraction

and the value of the property

distributed.

(C) Allocation fraction—(1) In general.

The allocation fraction allocates

appreciation and accumulated income

between the chapter 13 and non-chapter

13 portions of a trust. The numerator of

the allocation fraction is the amount of

the addition (valued as of the date the

addition is made), determined without

regard to whether any part of the

transfer is subject to tax under chapter

11 or chapter 12, but reduced by the

amount of any Federal or state estate or

gift tax imposed and subsequently paid

by the recipient trust with respect to the

addition. The denominator of the

allocation fraction is the total value of

the entire trust immediately after the

addition. For purposes of this paragraph

(b)(1)(iv)(C), the total value of the entire

trust is the fair market value of the

property held in trust (determined

under the rules of section 2031),

reduced by any amount attributable to

or paid by the trust and attributable to

the transfer to the trust that is similar to

an amount that would be allowable as

a deduction under section 2053 if the

addition had occurred at the death of

the transferor, and further reduced by

the same amount that the numerator

was reduced to reflect Federal or state

estate or gift tax incurred by and

subsequently paid by the recipient trust

with respect to the addition. Where

there is more than one addition to

principal after September 25, 1985, the

portion of the trust subject to chapter 13

after each such addition is determined

pursuant to a revised fraction. In each

case, the numerator of the revised

fraction is the sum of the value of the

chapter 13 portion of the trust

immediately before the latest addition,

and the amount of the latest addition.

The denominator of the revised fraction

is the total value of the entire trust

immediately after the addition. If the

transfer to the trust is a generationskipping transfer, the numerator and

denominator are reduced by the amount

of the generation-skipping transfer tax,

if any, that is imposed by chapter 13 on

the transfer and actually recovered from

the trust. The allocation fraction is

rounded off to five decimal places

(.00001).

(2) Examples. The following examples

illustrate the application of paragraph

(b)(1)(iv) of this section. In each of the

examples, assume that the recipient

trust does not pay any Federal or state

transfer tax by reason of the addition.

Example 1. Post September 25, 1985,

addition to trust. (i) On August 16, 1980, T

established an irrevocable trust. Under the

trust instrument, the trustee is required to

distribute the entire income annually to T’s

child, C, for life, then to T’s grandchild, GC,

for life. Upon GC’s death, the remainder is to

be paid to GC’s issue. On October 1, 1986,

when the total value of the entire trust is

$400,000, T transfers $100,000 to the trust.

The allocation fraction is computed as

follows:

Value of addition

Total value of trust = + = $100,

$400, $100, . 000

000 000

2

(ii) Thus, immediately after the transfer, 20

percent of the value of future generationskipping transfers under the trust will be

subject to chapter 13.

Example 2. Effect of expenses. Assume the

same facts as in Example 1, except

immediately prior to the transfer on October

1, 1986, the fair market value of the

individual assets in the trust totaled

$400,000. Also, assume that the trust had

accrued and unpaid debts, expenses, and

taxes totaling $300,000. Assume further that

the entire $300,000 represented amounts that

would be deductible under section 2053 if

the trust were includible in the transferor’s

gross estate. The numerator of the allocation

fraction is $100,000 and the denominator of

the allocation fraction is $200,000

(($400,000¥$300,000)+$100,000). Thus, the

allocation fraction is .5 ($100,000/$200,000)

and 50 percent of the value of future

generation-skipping transfers will be subject

to chapter 13.

Example 3. Multiple additions. (i) Assume

the same facts as in Example 1, except on

January 30, 1988, when the total value of the

entire trust is $600,000, T transfers an

additional $40,000 to the trust. Before the

transfer, the value of the portion of the trust

that was attributable to the prior addition

was $120,000 ($600,000×.2). The new

allocation fraction is computed as follows:

Total value of additions

Total value of trust = +

+ = = $120, $40,

$600, $40,

$160,

$640, . 000 000

000 000

000

000

25

(ii) Thus, immediately after the transfer, 25

percent of the value of future generationskipping transfers under the trust will be

subject to chapter 13.

Example 4. Allocation fraction at time of

generation-skipping transfer. Assume the

same facts as in Example 3, except on March

1, 1989, when the value of the trust is

$800,000, C dies. A generation-skipping

transfer occurs at C’s death because of the

termination of C’s life estate. Therefore,

$200,000 ($800,000×.25) is subject to tax

under chapter 13.

(v) Constructive additions—(A)

Powers of Appointment. Except as

provided in paragraph (b)(1)(v)(B) of

this section, where any portion of a trust

remains in the trust after the postSeptember 25, 1985, release, exercise, or

lapse of a power of appointment over

that portion of the trust, and the release,

exercise, or lapse is treated to any extent

as a taxable transfer under chapter 11 or

chapter 12, the value of the entire

portion of the trust subject to the power

that was released, exercised, or lapsed is

treated as if that portion had been

withdrawn and immediately

retransferred to the trust at the time of

the release, exercise, or lapse. The

creator of the power will be considered

the transferor of the addition except to

the extent that the release, exercise, or

lapse of the power is treated as a taxable

transfer under chapter 11 or chapter 12.

See § 26.2652–1 for rules for

determining the identity of the

transferor of property for purposes of

chapter 13.

(B) Special rule for certain powers of

appointment. The release, exercise, or

lapse of a power of appointment (other

than a general power of appointment as

defined in section 2041(b)) is not treated

as an addition to a trust if—

(1) Such power of appointment was

created in an irrevocable trust that is not

subject to chapter 13 under paragraph

(b)(1) of this section; and

(2) In the case of an exercise, the

power of appointment is not exercised

in a manner that may postpone or
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suspend the vesting, absolute ownership

or power of alienation of an interest in

property for a period, measured from

the date of creation of the trust,

extending beyond any life in being at

the date of creation of the trust plus a

period of 21 years plus, if necessary, a

reasonable period of gestation (the

perpetuities period). For purposes of

this paragraph (b)(1)(v)(B)(2), the

exercise of a power of appointment that

validly postpones or suspends the

vesting, absolute ownership or power of

alienation of an interest in property for

a term of years that will not exceed 90

years (measured from the date of

creation of the trust) will not be

considered an exercise that postpones or

suspends vesting, absolute ownership or

the power of alienation beyond the

perpetuities period. If a power is

exercised by creating another power, it

is deemed to be exercised to whatever

extent the second power may be

exercised.

(C) Constructive addition if liability is

not paid out of trust principal. Where a

trust described in paragraph (b)(1) of

this section is relieved of any liability

properly payable out of the assets of

such trust, the person or entity who

actually satisfies the liability is

considered to have made a constructive

addition to the trust in an amount equal

to the liability. The constructive

addition occurs when the trust is

relieved of liability (e.g., when the right

of recovery is no longer enforceable).

But see § 26.2652–1(a)(3) for rules

involving the application of section

2207A in the case of an election under

section 2652(a)(3).

(D) Examples. The following

examples illustrate the application of

this paragraph (b)(1)(v):

Example 1. Lapse of a power of

appointment. On June 19, 1980, T

established an irrevocable trust with a corpus

of $500,000. The trust instrument provides

that the trustee shall distribute the entire

income from the trust annually to T’s spouse,

S, during S’s life. At S’s death, the remainder

is to be distributed to T and S’s grandchild,

GC. T also gave S a general power of

appointment over one-half of the trust assets.

On December 21, 1989, when the value of the

trust corpus is $1,500,000, S died without

having exercised the general power of

appointment. The value of one-half of the

trust corpus, $750,000 ($1,500,000 × .5) is

included in S’s gross estate under section

2041(a) and is subject to tax under Chapter

11. Because the value of one-half of the trust

corpus is subject to tax under Chapter 11

with respect to S’s estate, S is treated as the

transferor of that property for purposes of

Chapter 13 (see section 2652(a)(1)(A)). For

purposes of the generation-skipping transfer

tax, the lapse of S’s power of appointment is

treated as if $750,000 ($1,500,000 × .5) had

been distributed to S and then transferred

back to the trust. Thus, S is considered to

have added $750,000 ($1,500,000 × .5) to the

trust at the date of S’s death. Because this

constructive addition occurred after

September 25, 1985, 50 percent of the corpus

of the trust became subject to Chapter 13 at

S’s death.

Example 2. Multiple actual additions. On

June 19, 1980, T established an irrevocable

trust with a principal of $500,000. The trust

instrument provides that the trustee shall

distribute the entire income from the trust

annually to T’s spouse, S, during S’s life. At

S’s death, the remainder is to be distributed

to GC, the grandchild of T and S. On October

1, 1985, when the trust assets were valued at

$800,000, T added $200,000 to the trust.

After the transfer on October 1, 1985, the

allocation fraction was .2 ($200,000/

$1,000,000). On December 21, 1989, when

the value of the trust principal is $1,000,000,

T adds $1,000,000 to the trust. After this

addition, the new allocation fraction is 0.6

($1,200,000/$2,000,000). The numerator of

the fraction is the value of that portion of

trust assets that were subject to chapter 13

immediately prior to the addition (by reason

of the first addition), $200,000 (.2 ÷

$1,000,000), plus the value of the second

transfer, $1,000,000, which equals

$1,200,000. The denominator of the fraction,

$2,000,000, is the total value of the trust

assets immediately after the second transfer.

Thus, 60 percent of the principal of the trust

becomes subject to chapter 13.

Example 3. Entire portion of trust subject

to lapsed power is treated as an addition. On

September 25, 1985, B possessed a general

power of appointment over the assets of an

irrevocable trust that had been created by T

in 1980. Under the terms of the trust, B’s

power lapsed on July 20, 1987. For Federal

gift tax purposes, B is treated as making a gift

of ninety-five percent (100%—5%) of the

value of the principal (see section 2514).

However, because the entire trust was subject

to the power of appointment, 100 percent

(that portion of the trust subject to the power)

of the assets of the trust are treated as a

constructive addition. Thus, the entire

amount of all generation-skipping transfers

occurring pursuant to the trust instrument

after July 20, 1987, are subject to chapter 13.

Example 4. Exercise of power of

appointment in favor of another trust. On

March 1, 1985, T established an irrevocable

trust as defined in paragraph (b)(1)(ii) of this

section. Under the terms of the trust

instrument, the trustee is required to

distribute the entire income annually to T’s

child, C, for life, then to T’s grandchild, GC,

for life. GC has the power to appoint any or

all of the trust assets to Trust 2 which is an

irrevocable trust (as defined in paragraph

(b)(1)(ii) of this section) that was established

on August 1, 1985. The terms of Trust 2’s

governing instrument provide that the trustee

shall pay income to T’s great grandchild,

GGC, for life. Upon GGC’s death the

remainder is to be paid to GGC’s issue. GGC

was alive on March 1, 1985, when Trust 1

was created. C died on April 1, 1986. On July

1, 1987, GC exercised the power of

appointment. The exercise of GC’s power

does not subject future transfers from Trust

2 to tax under chapter 13 because the

exercise of the power in favor of Trust 2 does

not suspend the vesting, absolute ownership,

or power of alienation of an interest in

property for a period, measured from the date

of creation of Trust 1, extending beyond the

life of GGC (a beneficiary under Trust 2 who

was in being at the date of creation of Trust

1) plus a period of 21 years. The result would

be the same if Trust 2 had been created after

the effective date of chapter 13.

Example 5. Exercise of power of

appointment in favor of another trust.

Assume the same facts as in Example 3,

except that GGC was born on March 28, 1986.

The valid exercise of GC’s power in favor of

Trust 2 causes the principal of Trust 1 to be

subject to chapter 13, because GGC was not

born until after the creation of Trust 1. Thus,

such exercise may suspend the vesting,

absolute ownership, or power of alienation of

an interest in the trust principal for a period,

measured from the date of creation of Trust

1, extending beyond the life of GGC (a

beneficiary under Trust 2 who was not a life

in being at the date of creation of Trust 1).

Example 6. Extension for the longer of two

periods. Prior to the effective date of chapter

13, GP established an irrevocable trust under

which the trust income was to be paid to

GP’s child, C, for life. C was given a

testamentary power to appoint the remainder

in further trust for the benefit of C’s issue. In

default of C’s exercise of the power, the

remainder was to pass to charity. C died on

February 3, 1995, survived by a child who

was alive when GP established the trust. C

exercised the power in a manner that validly

extends the trust in favor of C’s issue until

the latter of May 15, 2064 (80 years from the

date the trust was created), or the death of

C’s child plus 21 years. C’s exercise of the

power is a constructive addition to the trust

because the exercise may extend the trust for

a period longer than the permissible periods

of either the life of C’s child (a life in being

at the creation of the trust) plus 21 years or

a term not more than 90 years measured from

the creation of the trust. On the other hand,

if C’s exercise of the power could extend the

trust based only on the life of C’s child plus

21 years or only for a term of 80 years from

the creation of the trust (but not the later of

the two periods) then the exercise of the

power would not have been a constructive

addition to the trust.

Example 7. Extension for the longer of two

periods. The facts are the same as in Example

6 except local law provides that the effect of

C’s exercise is to extend the term of the trust

until May 15, 2064, whether or not C’s child

predeceases that date by more than 21 years.

C’s exercise is not a constructive addition to

the trust because C exercised the power in a

manner that cannot postpone or suspend

vesting, absolute ownership, or power of

alienation for a term of years that will exceed

90 years. The result would be the same if the

effect of C’s exercise is either to extend the

term of the trust until 21 years after the death

of C’s child or to extend the term of the trust

until the first to occur of May 15, 2064 or 21

years after the death of C’s child.

(vi) Appreciation and income. Except

to the extent that the provisions of

paragraphs (b)(1)(iv) and (v) of this
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section allocate subsequent appreciation

and accumulated income between the

original trust and additions thereto,

appreciation in the value of the trust

and undistributed income added thereto

are not considered an addition to the

principal of a trust.

(2) Transition rule for wills or

revocable trusts executed before October

22, 1986—(i) In general. The provisions

of chapter 13 do not apply to any

generation-skipping transfer under a

will or revocable trust executed before

October 22, 1986, provided that—

(A) The document in existence on

October 21, 1986, is not amended at any

time after October 21, 1986, in any

respect which results in the creation of,

or an increase in the amount of, a

generation-skipping transfer;

(B) In the case of a revocable trust, no

addition is made to the revocable trust

after October 21, 1986, that results in

the creation of, or an increase in the

amount of, a generation-skipping

transfer; and

(C) The decedent dies before January

1, 1987.

(ii) Revocable trust defined. For

purposes of this section, the term

revocable trust means any trust (as

defined in section 2652(b)) except to the

extent that, on October 22, 1986, the

trust—

(A) Was an irrevocable trust described

in paragraph (b)(1) of this section; or

(B) Would have been an irrevocable

trust described in paragraph (b)(1) of

this section had it not been created or

become irrevocable after September 25,

1985, and before October 22, 1986.

(iii) Will or revocable trust containing

qualified terminable interest property.

The rules contained in paragraph

(b)(1)(iii) of this section apply to any

will or revocable trust within the scope

of the transition rule of this paragraph

(b)(2).

(iv) Amendments to will or revocable

trust. For purposes of this paragraph

(b)(2), an amendment to a will or a

revocable trust in existence on October

21, 1986, is not considered to result in

the creation of, or an increase in the

amount of, a generation-skipping

transfer where the amendment is—

(A) Basically administrative or

clarifying in nature and only

incidentally increases the amount

transferred; or

(B) Designed to ensure that an existing

bequest or transfer qualifies for the

applicable marital or charitable

deduction for estate, gift, or generationskipping transfer tax purposes and only

incidentally increases the amount

transferred to a skip person or to a

generation-skipping trust.

(v) Creation of, or increase in the

amount of, a GST. In determining

whether a particular amendment to a

will or revocable trust creates, or

increases the amount of, a generationskipping transfer for purposes of this

paragraph (b)(2), the effect of the

instrument(s) in existence on October

21, 1986, is measured against the effect

of the instrument(s) in existence on the

date of death of the decedent or on the

date of any prior generation-skipping

transfer. If the effect of an amendment

cannot be immediately determined, it is

deemed to create, or increase the

amount of, a generation-skipping

transfer until a determination can be

made.

(vi) Additions to revocable trusts. Any

addition made after October 21, 1986,

but before the death of the settlor, to a

revocable trust subjects all subsequent

generation-skipping transfers under the

trust to the provisions of chapter 13.

Any addition made to a revocable trust

after the death of the settlor (if the

settlor dies before January 1, 1987) is

treated as an addition to an irrevocable

trust. See paragraph (b)(1)(v) of this

section for rules involving constructive

additions to trusts. See paragraph

(b)(1)(v)(B) of this section for rules

providing that certain transfers to trusts

are not treated as additions for purposes

of this section.

(vii) Examples. The following

examples illustrate the application of

paragraph (b)(2)(iv) of this section:

(A) Facts applicable to Examples 1

through 5. In each of Examples 1

through 5 assume that T executed a will

prior to October 22, 1986, and that T

dies on December 31, 1986.

Example 1. Administrative change. On

November 1, 1986, T executes a codicil to T’s

will removing one of the co-executors named

in the will. Although the codicil may have

the effect of lowering administrative costs

and thus increasing the amount transferred,

it is considered administrative in nature and

thus does not cause generation-skipping

transfers under the will to be subject to

chapter 13.

Example 2. Effect of amendment not

immediately determinable. On November 1,

1986, T executes a codicil to T’s will

revoking a bequest of $100,000 to C, a nonskip person (as defined under section

2613(b)) and causing that amount to be added

to a residuary trust held for a skip person.

The amendment is deemed to increase the

amount of a generation-skipping transfer and

prevents any transfers under the will from

qualifying under paragraph (b)(2)(i) of this

section. If, however, C dies before T and

under local law the property would have

been added to the residue in any event

because the bequest would have lapsed, the

codicil is not considered an amendment that

increases the amount of a generationskipping transfer.

Example 3. Refund of tax paid because of

amendment. T’s will provided that an

amount equal to the maximum allowable

marital deduction would pass to T’s spouse

with the residue of the estate passing to a

trust established for the benefit of skip

persons. On October 23, 1986, the will is

amended to provide that the marital share

passing to T’s spouse shall be the lesser of

the maximum allowable marital deduction or

the minimum amount that will result in no

estate tax liability for T’s estate. The

amendment may increase the amount of a

generation-skipping transfer. Therefore, any

generation-skipping transfers under the will

are subject to tax under chapter 13. If it

becomes apparent that the amendment does

not increase the amount of a generationskipping transfer, a claim for refund may be

filed with respect to any generation-skipping

transfer tax that was paid within the period

set forth in section 6511. For example, it

would become apparent that the amendment

did not result in an increase in the residue

if it is subsequently determined that the

maximum marital deduction and the

minimum amount that will result in no estate

tax liability are equal in amount.

Example 4. An amendment that increases

a generation-skipping transfer causes

complete loss of exempt status. T’s will

provided for the creation of two trusts for the

benefit of skip persons. On November 1,

1986, T executed a codicil to the will

specifically increasing the amount of a

generation-skipping transfer under the will.

All transfers made pursuant to the will or

either of the trusts created thereunder are

precluded from qualifying under the

transition rule of paragraph (b)(2)(i) of this

section and are subject to tax under chapter

13.

Example 5. Corrective action effective.

Assume that T in Example 4 later executes

a second codicil deleting the increase to the

generation-skipping transfer. Because the

provision increasing a generation-skipping

transfer does not become effective, it is not

considered an amendment to a will in

existence on October 22, 1986.

(B) Facts applicable to Examples 6

through 9. T created a trust on

September 30, 1985, in which T

retained the power to revoke the transfer

at any time prior to T’s death. The trust

provided that, upon the death of T, the

income was to be paid to T’s spouse, W,

for life and then to A, B, and C, the

children of T’s sibling, S, in equal

shares for life, with one-third of the

principal to be distributed per stirpes to

each child’s surviving issue upon the

death of the child. The trustee has the

power to make discretionary

distributions of trust principal to T’s

sibling, S.

Example 6. Amendment that affects only a

person who is not a skip person. A became

disabled, and T modified the trust on

December 1, 1986, to increase A’s share of

the income. Since the amendment does not

result in the creation of, or increase in the

amount of, a generation-skipping transfer,
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transfers pursuant to the trust are not subject

to chapter 13.

Example 7. Amendment increasing skip

person’s share. Assume that A, B, and C are

the grandchildren of S rather than the

children (and thus are skip persons as

defined in section 2613). T’s amendment of

the trust increasing A’s share of the income

subjects the trust to the provisions of chapter

13 because the amendment increases the

amount of the generation-skipping transfers

to be made to A.

Example 8. Amendment that adds a skip

person. Assume that T amends the trust to

add T’s grandchild, D, as an income

beneficiary. The trust will be subject to the

provisions of chapter 13 because the

amendment creates a generation-skipping

transfer.

Example 9. Refund of tax paid during

interim period when effect of amendment is

not determinable. Assume that T amends the

trust to provide that the issue of S are to take

a one-fourth share of the principal per stirpes

upon S’s death. Because the distribution to

be made upon S’s death may involve skip

persons, the amendment is considered an

amendment that creates or increases the

amount of a generation-skipping transfer

until a determination can be made.

Accordingly, any distributions from (or

terminations of interests in) such trust are

subject to chapter 13 until it is determined

that no skip person has been added to the

trust. At that time, a claim for refund may be

filed within the period set forth in section

6511 with respect to any generation-skipping

transfer tax that was paid.

(3) Transition rule in the case of

mental incompetency—(i) In general. If

an individual was under a mental

disability to change the disposition of

his or her property continuously from

October 22, 1986, until the date of his

or her death, the provisions of chapter

13 do not apply to any generationskipping transfer-(A) Under a trust (as

defined in section 2652(b)) to the extent

such trust consists of property, or the

proceeds of property, the value of which

was included in the gross estate of the

individual (other than property

transferred by or on behalf of the

individual during the individual’s life

after October 22, 1986); or

(B) Which is a direct skip (other than

a direct skip from a trust) that occurs by

reason of the death of the individual.

(ii) Mental disability defined. For

purposes of this paragraph (b)(2), the

term mental disability means mental

incompetence to execute an instrument

governing the disposition of the

individual’s property, whether or not

there was an adjudication of

incompetence and regardless of whether

there has been an appointment of a

guardian, fiduciary, or other person

charged with either the care of the

individual or the care of the individual’s

property.

(iii) Decedent who has not been

adjudged mentally incompetent. If there

has not been a court adjudication that

the decedent was mentally incompetent

on or before October 22, 1986, the

executor must file, with Form 706,

either—

(A) A certification from a qualified

physician stating that the decedent

was—

(1) mentally incompetent at all times

on and after October 22, 1986; and

(2) did not regain competence to

modify or revoke the terms of the trust

or will prior to his or her death; or

(B) Sufficient other evidence

demonstrating that the decedent was

mentally incompetent at all times on

and after October 22, 1986, as well as a

statement explaining why no

certification is available from a

physician; and

(C) Any judgment or decree relating to

the decedent’s incompetency that was

made after October 22, 1986. Such items

will be considered relevant, but not

determinative, in establishing the

decedent’s state of competency.

(iv) Decedent who has been adjudged

mentally incompetent. If the decedent

has been adjudged mentally

incompetent on or before October 22,

1986, a copy of the judgment or decree,

and any modification thereof, must be

filed with the Form 706.

(v) Rule applies even if another

person has power to change trust terms.

In the case of a transfer from a trust, this

paragraph (b)(3) applies even though a

person charged with the care of the

decedent or the decedent’s property has

the power to revoke or modify the terms

of the trust, provided that the power is

not exercised after October 22, 1986, in

a manner that creates, or increases the

amount of, a generation-skipping

transfer. See paragraph (b)(2)(iv) of this

section for rules concerning

amendments that create or increase the

amount of a generation-skipping

transfer.

(vi) Example. The following example

illustrates the application of paragraph

(b)(3)(v) of this section:

Example. T was mentally incompetent on

October 22, 1986, and remained so until

death in 1993. Prior to becoming

incompetent, T created a revocable

generation-skipping trust that was includible

in T’s gross estate. Prior to October 22, 1986,

the appropriate court issued an order under

which P, who was thereby charged with the

care of T’s property, had the power to modify

or revoke the revocable trust. Although P

exercised the power after October 22, 1986,

and while T was incompetent, the power was

not exercised in a manner that created, or

increased the amount of, a generationskipping transfer. Thus, the existence and

exercise of P’s power did not cause the trust

to lose its exempt status under paragraph

(b)(3) of this section. The result would be the

same if the court order was issued after

October 22, 1986.

(4) Exceptions to additions rule—(i) In

general. Any addition to a trust made

pursuant to an instrument or

arrangement covered by the transition

rules in paragraph (b) (2) or (3) of this

section is not treated as an addition for

purposes of this section. Moreover, any

property transferred inter vivos to a

trust is not treated as an addition if the

same property would have been added

to the trust pursuant to an instrument

covered by the transition rules in

paragraph (b) (2) or (3) of this section.

(ii) Examples. The following

examples illustrate the application of

paragraph (b)(4)(i) of this section:

Example 1. Addition pursuant to terms of

exempt instrument. On December 31, 1980,

T created an irrevocable trust having a

principal of $100,000. Under the terms of the

trust, the principal was to be held for the

benefit of T’s grandchild, GC. Pursuant to the

terms of T’s will, a document entitled to

relief under the transition rule of paragraph

(b)(2) of this section, the residue of the estate

was paid to the trust. Because the addition

to the trust was paid pursuant to the terms

of an instrument (T’s will) that is not subject

to the provisions of chapter 13 because of

paragraph (b)(2) of this section, the payment

to the trust is not considered an addition to

the principal of the trust. Thus, distributions

to or for the benefit of GC, are not subject to

the provisions of chapter 13.

Example 2. Property transferred inter vivos

that would have been transferred to the same

trust by the transferor’s will. T is the grantor

of a trust that was irrevocable on September

25, 1985. T’s will, which was executed before

October 22, 1986, and not amended

thereafter, provides that, upon T’s death, the

entire estate will pour over into T’s trust. On

October 1, 1985, T transfers $100,000 to the

trust. While T’s will otherwise qualifies for

relief under the transition rule in paragraph

(b)(2) of this section, the transition rule is not

applicable unless T dies prior to January 1,

1987. Thus, if T dies after December 31,

1986, the transfer is treated as an addition to

the trust for purposes of any distribution

made from the trust after the transfer to the

trust on October 1, 1985. If T dies before

January 1, 1987, the entire trust (as well as

any distributions from or terminations of

interests in the trust prior to T’s death) is

exempt, under paragraph (b)(2) of this

section, from chapter 13 because the

$100,000 would have been added to the trust

under a will that would have qualified under

paragraph (b)(2) of this section. In either case,

for any generation-skipping transfers made

after the transfer to the trust on October 1,

1985, but before T’s death, the $100,000 is

treated as an addition to the trust and a

proportionate amount of the trust is subject

to chapter 13.

Example 3. Pour over to a revocable trust.

T and S are the settlors of separate revocable

trusts with equal values. Both trusts were

established for the benefit of skip persons (as
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defined in section 2613). S dies on December

1, 1985, and under the provisions of S’s trust,

the principal pours over into T’s trust. If T

dies before January 1, 1987, the entire trust

is excluded under paragraph (b)(2) of this

section from the operation of chapter 13. If

T dies after December 31, 1986, the entire

trust is subject to the generation-skipping

transfer tax provisions because T’s trust is

not a trust described in paragraph (b)(1) or (2)

of this section. In the latter case, the fact that

S died before January 1, 1987, is irrelevant

because the principal of S’s trust was added

to a trust that never qualified under the

transition rules of paragraph (b)(1) or (2) of

this section.

Example 4. Pour over to exempt trust.

Assume the same facts as in Example 3,

except upon the death of S on December 1,

1985, S’s trust continues as an irrevocable

trust and that the principal of T’s trust is to

be paid over upon T’s death to S’s trust.

Again, if T dies before January 1, 1987, S’s

entire trust falls within the provisions of

paragraph (b)(2) of this section. However, if

T dies after December 31, 1986, the pour-over

is considered an addition to the trust.

Therefore, S’s trust is not a trust excluded

under paragraph (b)(2) of this section because

an addition is made to the trust.

Example 5. Lapse of a general power of

appointment. S, the spouse of the settlor of

an irrevocable trust that was created in 1980,

had, on September 25, 1985, a general power

of appointment over the trust assets. The

trust provides that should S fail to exercise

the power of appointment the property is to

remain in the trust. On October 21, 1986, S

executed a will under which S failed to

exercise the power of appointment. If S dies

before January 1, 1987, without having

exercised the power in a manner which

results in the creation of, or increase in the

amount of, a generation-skipping transfer (or

amended the will in a manner that results in

the creation of, or increase in the amount of,

a generation-skipping transfer), transfers

pursuant to the trust or the will are not

subject to chapter 13 because the trust is an

irrevocable trust and the will qualifies under

paragraph (b)(2) of this section.

Example 6. Lapse of general power of

appointment held by intestate decedent.

Assume the same facts as in Example 5,

except on October 22, 1986, S did not have

a will and that S dies after that date. Upon

S’s death, or upon the prior exercise or

release of the power, the value of the entire

trust is treated as having been distributed to

S, and S is treated as having made an

addition to the trust in the amount of the

entire principal. Any distribution or

termination pursuant to the trust occurring

after S’s death is subject to chapter 13. It is

immaterial whether S’s death occurs before

January 1, 1987, since paragraph (b)(2) of this

section is only applicable where a will or

revocable trust was executed before October

22, 1986.

(c) Additional effective dates. Except

as otherwise provided, the regulations

under §§ 26.2611–1, 26.2612–1,

26.2613–1, 26.2632–1, 26.2641–1,

26.2642–1, 26.2642–2, 26.2642–3,

26.2642–4, 26.2642–5, 26.2652–1,

26.2652–2, 26.2653–1, 26.2654–1,

26.2663–1, and 26.2663–2 are effective

with respect to generation-skipping

transfers as defined in § 26.2611–1 made

on or after [December 27, 1995].

However, taxpayers may, at their option,

rely on these regulations in the case of

generation-skipping transfers made, and

trusts that became irrevocable, after

December 23, 1992, and before

December 27, 1995.

§ 26.2611–1 Generation-skipping transfer

defined.

A generation-skipping transfer (GST)

is an event that is either a direct skip,

a taxable distribution, or a taxable

termination. See § 26.2612–1 for the

definition of these terms. The

determination as to whether an event is

a GST is made by reference to the most

recent transfer subject to the estate or

gift tax. See § 26.2652–1(a)(2) for

determining whether a transfer is

subject to Federal estate or gift tax.

§ 26.2612–1 Definitions.

(a) Direct skip—(1) In general. A

direct skip is a transfer to a skip person

that is subject to Federal estate or gift

tax. If property is transferred to a trust,

the transfer is a direct skip only if the

trust is a skip person. Only one direct

skip occurs when a single transfer of

property skips two or more generations.

See paragraph (d) of this section for the

definition of skip person. See § 26.2652–

1(b) for the definition of trust. See

§ 26.2632–1(c)(4) for the time that a

direct skip occurs if the transferred

property is subject to an estate tax

inclusion period.

(2) Special rule for certain lineal

descendants—(i) In general. Solely for

the purpose of determining whether a

transfer to or for the benefit of a lineal

descendant of the transferor, the

transferor’s spouse, or a former spouse

of the transferor is a direct skip, the

generation assignment of the descendant

is determined by disregarding the

generation of a predeceased individual

who was both an ancestor of the

descendant and a lineal descendant of

the transferor, the transferor’s spouse, or

a former spouse of the transferor (a

predeceased child). If a transfer to a

trust would be a direct skip but for this

paragraph, any generation assignment

determined under this paragraph

continues to apply in determining

whether any subsequent distribution

from (or termination of an interest in)

the portion of the trust attributable to

that transfer is a GST. A living

descendant who dies no later than 90

days after the subject transfer is treated

as having predeceased the transferor to

the extent that either the governing

instrument or applicable local law

provides that such individual shall be

treated as predeceasing the transferor.

Except as provided in this paragraph

(a)(2), a living descendant is not treated

as a predeceased child solely by reason

of applicable local law; e.g., an

individual is not treated as a

predeceased child solely because state

law treats an individual executing a

disclaimer as having predeceased the

transferor of the disclaimed property.

See § 26.2652–1(a)(1) for the definition

of transferor. See paragraph (e) of this

section for the definition of interest in

trust.

(ii) Special rule. If a transferor makes

an addition to an existing trust after the

death of an individual described in

paragraph (a)(2)(i) of this section (so that

the transferor would be assigned to a

lower generation by reason of that

death), the additional property is treated

as being held in a separate trust for

purposes of chapter 13 and the

provisions of § 26.2654–1(a)(2) apply as

if the portions of the single trust had

separate transferors. Subsequent

additions are treated as additions to the

appropriate portion of the single trust.

(b) Taxable termination—(1) In

general. Except as otherwise provided

in this paragraph (b), a taxable

termination is a termination (occurring

for any reason) of an interest in trust

unless—

(i) A transfer subject to Federal estate

or gift tax occurs with respect to the

property held in the trust at the time of

the termination (i.e., a new transferor is

determined with respect to the

property);

(ii) Immediately after the termination,

a person who is not a skip person has

an interest in the trust; or

(iii) At no time after the termination

may a distribution, other than a

distribution the probability of which

occurring is so remote as to be negligible

(including a distribution at the

termination of the trust) be made from

the trust to a skip person. For this

purpose, the probability that a

distribution will occur is so remote as

to be negligible only if it can be

ascertained by actuarial standards that

there is less than a 5 percent probability

that the distribution will occur.

(2) Partial termination. If a

distribution of a portion of trust

property is made to a skip person by

reason of a termination occurring on the

death of a lineal descendant of the

transferor, the termination is a taxable

termination with respect to the

distributed property.

(3) Simultaneous terminations. A

simultaneous termination of two or
Federal Register / Vol. 60, No. 248 / Wednesday, December 27, 1995 / Rules and Regulations 66911

more interests creates only one taxable

termination.

(c) Taxable distribution—(1) In

general. A taxable distribution is a

distribution of income or principal from

a trust to a skip person unless the

distribution is a taxable termination or

a direct skip. If any portion of GST tax

(including penalties and interest

thereon) imposed on a distributee is

paid from the distributing trust, the

payment is an additional taxable

distribution to the distributee. For

purposes of chapter 13, the additional

distribution is treated as having been

made on the last day of the calendar

year in which the original taxable

distribution is made. If Federal estate or

gift tax is imposed on any individual

with respect to an interest in property

held by a trust, the interest in property

is treated as having been distributed to

the individual to the extent that the

value of the interest is subject to Federal

estate or gift tax. See § 26.2652–1(a)(6)

Example 5, regarding the treatment of

the lapse of a power of appointment as

a transfer to a trust.

(2) Look-through rule not to apply.

Solely for purposes of determining

whether any transfer from a trust to

another trust is a taxable distribution,

the rules of section 2651(e)(2) do not

apply. If the transferring trust and the

recipient trust have the same transferor,

see § 26.2642–4(a) (1) and (2) for rules

for recomputing the applicable fraction

of the recipient trust.

(d) Skip person. A skip person is—

(1) An individual assigned to a

generation more than one generation

below that of the transferor (determined

under the rules of section 2651); or

(2) A trust if—

(i) All interests in the trust are held

by skip persons; or

(ii) No person holds an interest in the

trust and no distributions, other than a

distribution the probability of which

occurring is so remote as to be negligible

(including distributions at the

termination of the trust), may be made

after the transfer to a person other than

a skip person. For this purpose, the

probability that a distribution will occur

is so remote as to be negligible only if

it can be ascertained by actuarial

standards that there is less than a 5

percent probability that the distribution

will occur.

(e) Interest in trust—(1) In general. An

interest in trust is an interest in property

held in trust as defined in section

2652(c) and these regulations. An

interest in trust exists if a person—

(i) Has a present right to receive trust

principal or income;

(ii) Is a permissible current recipient

of trust principal or income and is not

described in section 2055(a); or

(iii) Is described in section 2055(a)

and the trust is a charitable remainder

annuity trust or unitrust (as defined in

section 664(d)) or a pooled income fund

(as defined in section 642(c)(5)).

(2) Exceptions—(i) Support

obligations. In general, an individual

has a present right to receive trust

income or principal if trust income or

principal may be used to satisfy the

individual’s support obligations.

However, an individual does not have

an interest in a trust merely because a

support obligation of that individual

may be satisfied by a distribution that is

either within the discretion of a

fiduciary or pursuant to provisions of

local law substantially equivalent to the

Uniform Gifts (Transfers) to Minors Act.

(ii) Certain interests disregarded. An

interest which is used primarily to

postpone or avoid the GST tax is

disregarded for purposes of chapter 13.

An interest is considered as used

primarily to postpone or avoid the GST

tax if a significant purpose for the

creation of the interest is to postpone or

avoid the tax.

(3) Disclaimers. An interest does not

exist to the extent it is disclaimed

pursuant to a disclaimer that constitutes

a qualified disclaimer under section

2518.

(f) Examples. The following examples

illustrate the provisions of this section.

Unless stated otherwise, paragraph

(a)(2) of this section, which assigns

descendants to a higher generation

when there is a predeceased ancestor,

does not apply.

Example 1. Direct skip. T gratuitously

conveys Blackacre to T’s grandchild. Because

the transfer is a transfer to a skip person of

property subject to Federal gift tax, it is a

direct skip.

Example 2. Direct skip of more than one

generation. T gratuitously conveys Blackacre

to T’s great-grandchild. The transfer is a

direct skip. Only one GST tax is imposed on

the direct skip although two generations are

skipped by the transfer.

Example 3. Withdrawal power in trust. T

transfers $50,000 to a new trust providing

that trust income is to be paid to T’s child,

C, for life and, on C’s death, the trust

principal is to be paid to T’s descendants.

Under the terms of the trust, T grants four

grandchildren the right to withdraw $10,000

from the trust for a 60 day period following

the transfer. Since C, who is not a skip

person, has an interest in the trust, the trust

is not a skip person. T’s transfer to the trust

is not a direct skip.

Example 4. Taxable termination. T

establishes an irrevocable trust under which

the income is to be paid to T’s child, C, for

life. On the death of C, the trust principal is

to be paid to T’s grandchild, GC. Since C has

an interest in the trust, the trust is not a skip

person and the transfer to the trust is not a

direct skip. If C dies survived by GC, a

taxable termination occurs at C’s death

because C’s interest in the trust terminates

and thereafter the trust property is held by

a skip person who occupies a lower

generation than C.

Example 5. Direct skip of property held in

trust. T establishes a testamentary trust under

which the income is to be paid to T’s

surviving spouse, S, for life and the

remainder is to be paid to a grandchild of T

and S. T’s executor elects to treat the trust

as qualified terminable interest property

under section 2056(b)(7). The transfer to the

trust is not a direct skip because S, a person

who is not a skip person, holds a present

right to receive income from the trust. Upon

S’s death, the trust property is included in

S’s gross estate under section 2044 and

passes directly to a skip person. The GST

occurring at that time is a direct skip because

it is a transfer subject to chapter 11. The fact

that the interest created by T is terminated

at S’s death is immaterial because S becomes

the transferor at the time of the transfer

subject to chapter 11.

Example 6. Predeceased ancestor

exception. T establishes an irrevocable trust

providing that trust income is to be paid to

T’s grandchild, GC, for 5 years. At the end

of the 5-year period, the trust is to terminate

and the principal is to be distributed to GC.

T’s child, C, a parent of GC, is deceased at

the time T establishes the trust. Therefore,

GC is treated as a child of T rather than as

a grandchild. As a result, GC is not a skip

person, and the initial transfer to the trust is

not a direct skip. Similarly, distributions to

GC during the term of the trust and at the

termination of the trust will not be GSTs.

Example 7. Predeceased ancestor

exception not applicable. The facts are the

same as in Example 6, except the trust

income is to be paid to T’s spouse, S, during

the first two years of the trust. Since S has

an interest in the trust, the trust is not a skip

person and the transfer by T is not a direct

skip. Since the transfer is not a direct skip,

the predeceased ancestor rule does not apply

and GC is not treated as the child of T. A

taxable termination occurs at the expiration

of S’s interest.

Example 8. Taxable termination. T

establishes an irrevocable trust for the benefit

of T’s child, C, T’s grandchild, GC, and T’s

great-grandchild, GGC. Under the terms of

the trust, income and principal may be

distributed to any or all of the living

beneficiaries at the discretion of the trustee.

Upon the death of the second beneficiary to

die, the trust principal is to be paid to the

survivor. C dies first. A taxable termination

occurs at that time because, immediately

after C’s interest terminates, all interests in

the trust are held by skip persons (GC and

GGC).

Example 9. Taxable termination resulting

from distribution. The facts are the same as

in Example 8, except twenty years after C’s

death the trustee exercises its discretionary

power and distributes the entire principal to

GGC. The distribution results in a taxable

termination because GC’s interest in the trust

terminates as a result of the distribution of
66912 Federal Register / Vol. 60, No. 248 / Wednesday, December 27, 1995 / Rules and Regulations

the entire trust property to GGC, a skip

person. The result would be the same if the

trustee retained sufficient funds to pay the

GST tax due by reason of the taxable

termination, as well as any expenses of

winding up the trust.

Example 10. Simultaneous termination of

interests of more than one beneficiary. T

establishes an irrevocable trust for the benefit

of T’s child, C, T’s grandchild, GC, and T’s

great-grandchild, GGC. Under the terms of

the trust, income and principal may be

distributed to any or all of the living

beneficiaries at the discretion of the trustee.

Upon the death of C, the trust property is to

be distributed to GGC if then living. If C is

survived by both GC and GGC, both C’s and

GC’s interests in the trust will terminate on

C’s death. However, because both interests

will terminate at the same time and as a

result of one event, only one taxable

termination occurs.

Example 11. Partial taxable termination. T

creates an irrevocable trust providing that

trust income is to be paid to T’s children, A

and B, in such proportions as the trustee

determines for their joint lives. On the death

of the first child to die, one-half of the trust

principal is to be paid to T’s then living

grandchildren. The balance of the trust

principal is to be paid to T’s grandchildren

on the death of the survivor of A and B. If

A predeceases B, the distribution occurring

on the termination of A’s interest in the trust

is a taxable termination and not a taxable

distribution. It is a taxable termination

because the distribution is a distribution of

a portion of the trust that occurs as a result

of the death of A, a lineal descendant of T.

It is immaterial that a portion of the trust

continues and that B, a person other than a

skip person, thereafter holds an interest in

the trust.

Example 12. Taxable distribution. T

establishes an irrevocable trust under which

the trust income is payable to T’s child, C,

for life. When T’s grandchild, GC, attains 35

years of age, GC is to receive one-half of the

principal. The remaining one-half of the

principal is to be distributed to GC on C’s

death. Assume that C survives until GC

attains age 35. When the trustee distributes

one-half of the principal to GC on GC’s 35th

birthday, the distribution is a taxable

distribution because it is a distribution to a

skip person and is neither a taxable

termination nor a direct skip.

Example 13. Exercise of withdrawal right

as taxable distribution. The facts are the

same as in Example 12, except GC holds a

continuing right to withdraw trust principal

and after one year GC withdraws $10,000.

The withdrawal by GC is not a taxable

termination because the withdrawal does not

terminate C’s interest in the trust. The

withdrawal by GC is a taxable distribution to

GC.

Example 14. Interest in trust. T establishes

an irrevocable trust under which the income

is to be paid to T’s child, C, for life. On the

death of C, the trust principal is to be paid

to T’s grandchild, GC. Because C has a

present right to receive income from the

trust, C has an interest in the trust. Because

GC cannot currently receive distributions

from the trust, GC does not have an interest

in the trust.

Example 15. Support obligation. T

establishes an irrevocable trust for the benefit

of T’s grandchild, GC. The trustee has

discretion to distribute property for GC’s

support without regard to the duty or ability

of GC’s parent, C, to support GC. Because GC

is a permissible current recipient of trust

property, GC has an interest in the trust. C

does not have an interest in the trust because

the potential use of the trust property to

satisfy C’s support obligation is within the

discretion of a fiduciary. C would be treated

as having an interest in the trust if the trustee

was required to distribute trust property for

GC’s support.

§ 26.2613–1 Skip person.

For the definition of skip person see

§ 26.2612–1(d).

§ 26.2632–1 Allocation of GST exemption.

(a) General rule. Except as otherwise

provided in this section, an individual

or the individual’s executor may

allocate the individual’s $1 million GST

exemption at any time from the date of

the transfer through the date for filing

the individual’s Federal estate tax return

(including any extensions for filing that

have been actually granted). If no estate

tax return is required to be filed, the

GST exemption may be allocated at any

time through the date a Federal estate

tax return would be due if a return were

required to be filed (including any

extensions actually granted). If property

is held in trust, the allocation of GST

exemption is made to the entire trust

rather than to specific trust assets. If a

transfer is a direct skip to a trust, the

allocation of GST exemption to the

transferred property is also treated as an

allocation of GST exemption to the trust

for purposes of future GSTs with respect

to the trust by the same transferor.

(b) Lifetime allocations—(1)

Automatic allocation to direct skips—(i)

In general. If a direct skip occurs during

the transferor’s lifetime, the transferor’s

GST exemption not previously allocated

(unused GST exemption) is

automatically allocated to the

transferred property (but not in excess

of the fair market value of the property

on the date of the transfer). The

transferor may prevent the automatic

allocation of GST exemption by

describing on a timely-filed United

States Gift (and Generation-Skipping

Transfer) Tax Return (Form 709) the

transfer and the extent to which the

automatic allocation is not to apply. In

addition, a timely-filed Form 709

accompanied by payment of the GST tax

(as shown on the return with respect to

the direct skip) is sufficient to prevent

an automatic allocation of GST

exemption with respect to the

transferred property. See paragraph

(c)(4) of this section for special rules in

the case of direct skips treated as

occurring at the termination of an estate

tax inclusion period.

(ii) Time for filing Form 709. A Form

709 is timely filed if it is filed on or

before the date required for reporting

the transfer if it were a taxable gift (i.e.,

the date prescribed by section 6075(b),

including any extensions to file actually

granted (the due date)). Except as

provided in paragraph (b)(1)(iii) of this

section, the automatic allocation of GST

exemption (or the election to prevent

the allocation, if made) is irrevocable

after the due date. An automatic

allocation of GST exemption is effective

as of the date of the transfer to which

it relates. Except as provided above, a

Form 709 need not be filed to report an

automatic allocation.

(iii) Transitional rule. An election to

prevent an automatic allocation of GST

exemption filed on or before January 26,

1996, becomes irrevocable on July 24,

1996.

(2) Allocation to other transfers—(i) In

general. An allocation of GST

exemption to property transferred

during the transferor’s lifetime, other

than in a direct skip, is made on Form

709. The allocation must clearly identify

the trust to which the allocation is being

made, the amount of GST exemption

allocated to it, and if the allocation is

late or if an inclusion ratio greater than

zero is claimed, the value of the trust

assets at the effective date of the

allocation. See paragraph (b)(2)(ii) of

this section. The allocation should also

state the inclusion ratio of the trust after

the allocation. Except as otherwise

provided in this paragraph, an

allocation of GST exemption may be

made by a formula; e.g., the allocation

may be expressed in terms of the

amount necessary to produce an

inclusion ratio of zero. However,

formula allocations made with respect

to charitable lead annuity trusts are not

valid except to the extent they are

dependent on values as finally

determined for Federal estate or gift tax

purposes. With respect to a timely

allocation, an allocation of GST

exemption becomes irrevocable after the

due date of the return. Except as

provided in § 26.2642–3 (relating to

charitable lead annuity trusts), an

allocation of GST exemption to a trust

is void to the extent the amount

allocated exceeds the amount necessary

to obtain an inclusion ratio of zero with

respect to the trust. See § 26.2642–1 for

the definition of inclusion ratio. An

allocation is also void if the allocation

is made with respect to a trust that has

no GST potential with respect to the

transferor making the allocation, at the

time of the allocation. For this purpose,

a trust has GST potential even if the
Federal Register / Vol. 60, No. 248 / Wednesday, December 27, 1995 / Rules and Regulations 66913

possibility of a GST is so remote as to

be negligible.

(ii) Effective date of allocation—(A) In

general. (1) Except as otherwise

provided, an allocation of GST

exemption is effective as of the date of

any transfer as to which the Form 709

on which it is made is a timely filed

return (a timely allocation). If more than

one timely allocation is made, the

earlier allocation is modified only if the

later allocation clearly identifies the

transfer and the nature and extent of the

modification. Except as provided in

paragraph (d)(1) of this section, an

allocation to a trust made on a Form 709

filed after the due date for reporting a

transfer to the trust (a late allocation) is

effective on the date the Form 709 is

filed and is deemed to precede in point

of time any taxable event occurring on

such date. For purposes of this

paragraph (b)(2)(ii), the Form 709 is

deemed filed on the date it is

postmarked to the Internal Revenue

Service Center. See § 26.2642–2

regarding the effect of a late allocation

in determining the inclusion ratio, etc.

See paragraph (c)(1) of this section

regarding allocation of GST exemption

to property subject to an estate tax

inclusion period. If it is unclear whether

an allocation of GST exemption on a

Form 709 is a late or a timely allocation

to a trust, the allocation is effective in

the following order—

(i) To any transfer to the trust

disclosed on the return as to which the

return is a timely return;

(ii) As a late allocation; and

(iii) To any transfer to the trust not

disclosed on the return as to which the

return would be a timely return.

(2) A late allocation to a trust may be

made on a Form 709 that is timely filed

with respect to another transfer. A late

allocation is irrevocable when made.

(B) Amount of allocation. If other

transfers exist with respect to which

GST exemption could be allocated

under paragraphs (b)(2)(ii)(A)(1) (ii) and

(iii), any GST exemption allocated

under paragraph (b)(2)(ii)(A)(1)(i) of this

section is allocated in an amount equal

to the value of the transferred property

as reported on the Form 709. Thus, if

the GST exemption allocated on the

Form 709 exceeds the value of the

transfers reported on that return that

have generation-skipping potential, the

initial allocation under paragraph

(b)(2)(ii)(A)(1)(i) of this section is in the

amount of the value of those transfers as

reported on that return. Any remaining

amount of GST exemption allocated on

that return is then allocated pursuant to

paragraphs (b)(2)(ii)(A)(1) (ii) and (iii) of

this section, notwithstanding any

subsequent upward adjustment in value

of the transfers reported on the return.

(iii) Examples. The following

examples illustrate the provisions of

this paragraph (b):

Example 1. Modification of allocation of

GST exemption. T transfers $100,000 to an

irrevocable generation-skipping trust on

December 1, 1996. The transfer to the trust

is not a direct skip. The date prescribed for

filing the gift tax return reporting the taxable

gift is April 15, 1997. On February 10, 1997,

T files a Form 709 allocating $50,000 of GST

exemption to the trust. On April 10 of the

same year, T files an amended Form 709

allocating $100,000 of GST exemption to the

trust in a manner that clearly indicates the

intention to modify and supersede the prior

allocation with respect to the 1996 transfer.

The allocation made on the April 10 return

supersedes the prior allocation because it is

made on a timely-filed Form 709 that clearly

identifies the trust and the nature and extent

of the modification of GST exemption

allocation. The allocation of $100,000 of GST

exemption to the trust is effective as of

December 1, 1996. The result would be the

same if the amended Form 709 decreased the

amount of the GST exemption allocated to

the trust.

Example 2. Modification of allocation of

GST exemption. The facts are the same as in

Example 1, except on July 10, 1997, T files

a Form 709 attempting to reduce the earlier

allocation. The return is not a timely-filed

return. The $100,000 GST exemption

allocated to the trust, as amended on April

10, 1997, remains in effect because an

allocation, once made, is irrevocable and may

not be modified after the last date on which

a timely-filed Form 709 can be filed.

Example 3. Effective date of late allocation

of GST exemption. T transfers $100,000 to an

irrevocable generation-skipping trust on

December 1, 1996. The transfer to the trust

is not a direct skip. The date prescribed for

filing the gift tax return reporting the taxable

gift is April 15, 1997. On December 1, 1997,

T files a Form 709 and allocates $50,000 to

the trust. The allocation is effective as of

December 1, 1997.

Example 4. Effective date of late allocation

of GST exemption. T transfers $100,000 to a

generation-skipping trust on December 1,

1996, in a transfer that is not a direct skip.

T does not make an allocation of GST

exemption on a timely-filed Form 709. On

July 1, 1997, the trustee makes a taxable

distribution from the trust to T’s grandchild

in the amount of $30,000. Immediately prior

to the distribution, the value of the trust

assets was $150,000. On the same date, T

allocates GST exemption to the trust in the

amount of $50,000. The allocation of GST

exemption on the date of the transfer is

treated as preceding in point of time the

taxable distribution. At the time of the GST,

the trust has an inclusion ratio of .6667 (1 ¥

(50,000/150,000)).

Example 5. Automatic allocation to splitgift direct skip. On May 15, 1996, T transfers

$50,000 to a trust in a direct skip. T does not

file a timely gift tax return electing out of the

automatic allocation. On April 30, 1998, T

and T’s spouse, S, file an initial gift tax

return for 1996 on which they consent,

pursuant to section 2513, to have the gift

treated as if one-half had been made by each.

As a result of the election under section

2513, which is retroactive to the date of T’s

transfer, T and S are each treated as the

transferor of one-half of the property

transferred in the direct skip. Thus, $25,000

of T’s unused GST exemption and $25,000 of

S’s unused GST exemption is automatically

allocated to the trust. Both allocations are

effective on and after the date that T made

the transfer.

(c) Special rules during an estate tax

inclusion period—(1) In general. An

allocation of GST exemption (including

an automatic allocation) to property

subject to an estate tax inclusion period

(ETIP) that is made prior to termination

of the ETIP cannot be revoked, but

becomes effective no earlier than the

date of any termination of the ETIP with

respect to the trust. Where an allocation

has not been made prior to the

termination of the ETIP, an allocation is

effective at the termination of the ETIP

during the transferor’s lifetime if made

by the due date for filing a Form 709

that would apply to a taxable gift

occurring at the time the ETIP

terminates (timely ETIP return). An

allocation is effective in the case of the

termination of the ETIP on the death of

the transferor as provided in paragraph

(d) of this section. If any part of a trust

is subject to an ETIP, the entire trust is

subject to the ETIP. See § 26.2642–

1(b)(2) for rules determining the

inclusion ratio applicable in the case of

GSTs during an ETIP.

(2) Estate tax inclusion period

defined—(i) In general. An ETIP is the

period during which, should death

occur, the value of transferred property

would be includible (other than by

reason of section 2035) in the gross

estate of—

(A) The transferor; or

(B) The spouse of the transferor.

(ii) Exceptions—(A) For purposes of

paragraph (c)(2) of this section, the

value of transferred property is not

considered as being subject to inclusion

in the gross estate of the transferor or

the spouse of the transferor if the

possibility that the property will be

included is so remote as to be negligible.

A possibility is so remote as to be

negligible if it can be ascertained by

actuarial standards that there is less

than a 5 percent probability that the

property will be included in the gross

estate.

(B) For purposes of paragraph (c)(2) of

this section, the value of transferred

property is not considered as being

subject to inclusion in the gross estate

of the spouse of the transferor, if the

spouse possesses with respect to any

transfer to the trust, a right to withdraw
66914 Federal Register / Vol. 60, No. 248 / Wednesday, December 27, 1995 / Rules and Regulations

no more than the greater of $5,000 or 5

percent of the trust corpus, and such

withdrawal right terminates no later

than 60 days after the transfer to the

trust.

(C) The rules of this paragraph (c)(2)

do not apply to qualified terminable

interest property with respect to which

the special election under § 26.2652–2

has been made.

(3) Termination of an ETIP. An ETIP

terminates on the first to occur of—

(i) The death of the transferor;

(ii) The time at which no portion of

the property is includible in the

transferor’s gross estate (other than by

reason of section 2035) or, in the case

of an individual who is a transferor

solely by reason of an election under

section 2513, the time at which no

portion would be includible in the gross

estate of the individual’s spouse (other

than by reason of section 2035);

(iii) The time of a GST, but only with

respect to the property involved in the

GST; or

(iv) In the case of an ETIP arising by

reason of an interest or power held by

the transferor’s spouse under subsection

(c)(2)(i)(B) of this section, at the first to

occur of—

(A) The death of the spouse; or

(B) The time at which no portion of

the property would be includible in the

spouse’s gross estate (other than by

reason of section 2035).

(4) Treatment of direct skips. If

property transferred to a skip person is

subject to an ETIP, the direct skip is

treated as occurring on the termination

of the ETIP.

(5) Examples. The following examples

illustrate the rules of this section as they

apply to the termination of an ETIP

during the lifetime of the transferor. In

each example assume that T transfers

$100,000 to an irrevocable trust:

Example 1. Allocation of GST exemption

during ETIP. The trust instrument provides

that trust income is to be paid to T for 9 years

or until T’s prior death. The trust principal

is to be paid to T’s grandchild on the

termination of T’s income interest. If T dies

within the 9-year period, the value of the

trust principal is includible in T’s gross

estate under section 2036(a). Thus, the trust

is subject to an ETIP. T files a timely Form

709 reporting the transfer and allocating

$100,000 of GST exemption to the trust. The

allocation of GST exemption to the trust is

not effective until the termination of the

ETIP.

Example 2. Effect of prior allocation on

termination of ETIP. The facts are the same

as in Example 1, except the trustee has the

power to invade trust principal on behalf of

T’s grandchild, GC, during the term of T’s

income interest. In year 4, when the value of

the trust is $200,000, the trustee distributes

$15,000 to GC. The distribution is a taxable

distribution. The ETIP with respect to the

property distributed to GC terminates at the

time of the taxable distribution. See

paragraph (c)(3)(iii) of this section. Solely for

purposes of determining the trust’s inclusion

ratio with respect to the taxable distribution,

the prior $100,000 allocation of GST

exemption (as well as any additional

allocation made on a timely ETIP return) is

effective immediately prior to the taxable

distribution. See § 26.2642–1(b)(2). The

trust’s inclusion ratio with respect to the

taxable distribution is therefore .50

(1¥(100,000/200,000)).

Example 3. Split-gift transfers subject to

ETIP. The trust instrument provides that trust

income is to be paid to T for 9 years or until

T’s prior death. The trust principal is to be

paid to T’s grandchild on the termination of

T’s income interest. T files a timely Form 709

reporting the transfer. T’s spouse, S, consents

to have the gift treated as made one-half by

S under section 2513. Because S is treated as

transferring one-half of the property to T’s

grandchild, S becomes the transferor of onehalf of the trust for purposes of chapter 13.

Because the value of the trust would be

includible in T’s gross estate if T died

immediately after the transfer, S’s transfer is

subject to an ETIP. If S should die prior to

the termination of the trust, S’s executor may

allocate S’s GST exemption to the trust, but

only to the portion of the trust for which S

is treated as the transferor. However, the

allocation does not become effective until the

earlier of the expiration of T’s income

interest or T’s death.

Example 4. Transfer of retained interest as

ETIP termination. The trust instrument

provides that trust income is to be paid to T

for 9 years or until T’s prior death. The trust

principal is to be paid to T’s grandchild on

the termination of T’s income interest. Four

years after the initial transfer, T transfers the

income interest to T’s sibling. The ETIP with

respect to the trust terminates on T’s transfer

of the income interest because, after the

transfer, the trust property would not be

includible in T’s gross estate (other than by

reason of section 2035) if T died at that time.

(d) Allocations after the transferor’s

death—(1) Allocation by executor.

Except as otherwise provided in this

paragraph (d), an allocation of a

decedent’s unused GST exemption by

the executor of the decedent’s estate is

made on the appropriate United States

Estate (and Generation-Skipping

Transfer) Tax Return (Form 706 or Form

706NA) filed on or before the date

prescribed for filing the return by

section 6075(a) (including any

extensions actually granted (the due

date)). An allocation of GST exemption

with respect to property included in the

gross estate of a decedent is effective as

of the date of death. A timely allocation

of GST exemption by an executor with

respect to a lifetime transfer of property

that is not included in the transferor’s

gross estate is made on a Form 709. A

late allocation of GST exemption by an

executor, other than an allocation that is

deemed to be made under section

2632(b)(1), with respect to a lifetime

transfer of property is made on Form

706 or Form 706NA and is effective as

of the date the allocation is filed. An

allocation of GST exemption to a trust

(whether or not funded at the time the

Form 706 or Form 706NA is filed) is

effective if the notice of allocation

clearly identifies the trust and the

amount of the decedent’s GST

exemption allocated to the trust. An

executor may allocate the decedent’s

GST exemption by use of a formula. For

purposes of this section, an allocation is

void if the allocation is made for a trust

that has no GST potential with respect

to the transferor for whom the allocation

is being made, as of the date of the

transferor’s death. For this purpose, a

trust has GST potential even if the

possibility of a GST is so remote as to

be negligible.

(2) Automatic allocation after death.

A decedent’s unused GST exemption is

automatically allocated on the due date

for filing Form 706 or Form 706NA to

the extent not otherwise allocated by the

decedent’s executor on or before that

date. The automatic allocation occurs

whether or not a return is actually

required to be filed. Unused GST

exemption is allocated pro rata (subject

to the rules of § 26.2642–2(b)), on the

basis of the value of the property as

finally determined for purposes of

chapter 11 (chapter 11 value), first to

direct skips treated as occurring at the

transferor’s death. The balance, if any,

of unused GST exemption is allocated

pro rata (subject to the rules of

§ 26.2642–2(b)) on the basis of the

chapter 11 value of the nonexempt

portion of the trust property (or in the

case of trusts that are not included in

the gross estate, on the basis of the date

of death value of the trust) to trusts with

respect to which a taxable termination

may occur or from which a taxable

distribution may be made. The

automatic allocation of GST exemption

is irrevocable, and an allocation made

by the executor after the automatic

allocation is made is ineffective. No

automatic allocation of GST exemption

is made to a trust that will have a new

transferor with respect to the entire trust

prior to the occurrence of any GST with

respect to the trust. In addition, no

automatic allocation of GST exemption

is made to a trust if, during the nine

month period ending immediately after

the death of the transferor—

(i) No GST has occurred with respect

to the trust; and

(ii) At the end of such period no

future GST can occur with respect to the

trust.
Federal Register / Vol. 60, No. 248 / Wednesday, December 27, 1995 / Rules and Regulations 66915

§ 26.2641–1 Applicable rate of tax.

The rate of tax applicable to any GST

(applicable rate) is determined by

multiplying the maximum Federal

estate tax rate in effect at the time of the

GST by the inclusion ratio (as defined

in § 26.2642–1). For this purpose, the

maximum Federal estate tax rate is the

maximum rate set forth under section

2001(c) (without regard to section

2001(c)(2)).

§ 26.2642–1 Inclusion ratio.

(a) In general. Except as otherwise

provided in this section, the inclusion

ratio is determined by subtracting the

applicable fraction (rounded to the

nearest one-thousandth (.001)) from 1.

In rounding the applicable fraction to

the nearest one-thousandth, any amount

that is midway between one onethousandth and another one-thousandth

is rounded up to the higher of those two

amounts.

(b) Numerator of applicable fraction—

(1) In general. Except as otherwise

provided in this paragraph (b), and in

§§ 26.2642–3 (providing a special rule

for charitable lead annuity trusts) and

26.2642–4 (providing rules for the

redetermination of the applicable

fraction), the numerator of the

applicable fraction is the amount of GST

exemption allocated to the trust (or to

the transferred property in the case of a

direct skip not in trust).

(2) GSTs occurring during an ETIP—

(i) In general. For purposes of

determining the inclusion ratio with

respect to a taxable termination or a

taxable distribution that occurs during

an ETIP, the numerator of the applicable

fraction is the sum of—

(A) The GST exemption previously

allocated to the trust (including any

allocation made to the trust prior to any

taxable termination or distribution)

reduced (but not below zero) by the

nontax amount of any prior GSTs with

respect to the trust; and

(B) Any GST exemption allocated to

the trust on a timely ETIP return filed

after the termination of the ETIP. See

§ 26.2632–1(c)(5) Example 2.

(ii) Nontax amount of a prior GST. (1)

The nontax amount of a prior GST with

respect to the trust is the amount of the

GST multiplied by the applicable

fraction attributable to the trust at the

time of the prior GST.

(2) For rules regarding the allocation

of GST exemption to property during an

ETIP, see § 26.2632–1(c).

(c) Denominator of applicable

fraction—(1) In general. Except as

otherwise provided in this paragraph (c)

and in §§ 26.2642–3 and 26.2642–4, the

denominator of the applicable fraction

is the value of the property transferred

to the trust (or transferred in a direct

skip not in trust) (as determined under

§ 26.2642–2) reduced by the sum of—

(i) Any Federal estate tax and any

State death tax incurred by reason of the

transfer that is chargeable to the trust

and is actually recovered from the trust;

(ii) The amount of any charitable

deduction allowed under section 2055,

2106, or 2522 with respect to the

transfer; and

(iii) In the case of a direct skip, the

value of the portion of the transfer that

is a nontaxable gift. See paragraph (c)(3)

of this section for the definition of

nontaxable gift.

(2) Zero denominator. If the

denominator of the applicable fraction

is zero, the inclusion ratio is zero.

(3) Nontaxable gifts. Generally, for

purposes of chapter 13, a transfer is a

nontaxable gift to the extent the transfer

is excluded from taxable gifts by reason

of section 2503(b) (after application of

section 2513) or section 2503(e).

However, a transfer to a trust for the

benefit of an individual is not a

nontaxable gift for purposes of this

section unless—

(i) Trust principal or income may,

during the individual’s lifetime, be

distributed only to or for the benefit of

the individual; and

(ii) The assets of the trust will be

includible in the gross estate of the

individual if the individual dies before

the trust terminates.

(d) Examples. The following examples

illustrate the provisions of this section.

See § 26.2652–2(d) Examples 2 and 3 for

illustrations of the computation of the

inclusion ratio where the special

(reverse QTIP) election may be

applicable.

Example 1. Computation of the inclusion

ratio. T transfers $100,000 to a newly-created

irrevocable trust providing that income is to

be accumulated for 10 years. At the end of

10 years, the accumulated income is to be

distributed to T’s child, C, and the trust

principal is to be paid to T’s grandchild. T

allocates $40,000 of T’s GST exemption to

the trust on a timely-filed gift tax return. The

applicable fraction with respect to the trust

is .40 ($40,000 (the amount of GST

exemption allocated to the trust) over

$100,000 (the value of the property

transferred to the trust)). The inclusion ratio

is .60 (1 ¥ .40). If the maximum Federal

estate tax rate is 55 percent at the time of a

GST, the rate of tax applicable to the transfer

(applicable rate) will be .333 (55 percent (the

maximum estate tax rate) × .60 (the inclusion

ratio)).

Example 2. Gift entirely nontaxable. On

December 1, 1996, T transfers $10,000 to an

irrevocable trust for the benefit of T’s

grandchild, GC. GC possesses a right to

withdraw any contributions to the trust such

that the entire transfer qualifies for the

annual exclusion under section 2503(b).

Under the terms of the trust, the income is

to be paid to GC for 10 years or until GC’s

prior death. Upon the expiration of GC’s

income interest, the trust principal is payable

to GC or GC’s estate. The transfer to the trust

is a direct skip. T made no prior gifts to or

for the benefit of GC during 1996. The entire

$10,000 transfer is a nontaxable transfer. For

purposes of computing the tax on the direct

skip, the denominator of the applicable

fraction is zero, and thus, the inclusion ratio

is zero.

Example 3. Gift nontaxable in part. T

transfers $12,000 to an irrevocable trust for

the benefit of T’s grandchild, GC. Under the

terms of the trust, the income is to be paid

to GC for 10 years or until GC’s prior death.

Upon the expiration of GC’s income interest,

the trust principal is payable to GC or GC’s

estate. Further, GC has the right to withdraw

$10,000 of any contribution to the trust such

that $10,000 of the transfer qualifies for the

annual exclusion under section 2503(b). The

amount of the nontaxable transfer is $10,000.

Solely for purposes of computing the tax on

the direct skip, T’s transfer is divided into

two portions. One portion is equal to the

amount of the nontaxable transfer ($10,000)

and has a zero inclusion ratio; the other

portion is $2,000 ($12,000 ¥ $10,000). With

respect to the $2,000 portion, the

denominator of the applicable fraction is

$2,000. Assuming that T has sufficient GST

exemption available, the numerator of the

applicable fraction is $2,000 (unless T elects

to have the automatic allocation provisions

not apply). Thus, assuming T does not elect

to have the automatic allocation not apply,

the applicable fraction is one ($2,000/$2,000

= 1) and the inclusion ratio is zero (1 ¥ 1

= 0).

Example 4. Gift nontaxable in part.

Assume the same facts as in Example 3,

except T files a timely Form 709 electing that

the automatic allocation of GST exemption

not apply to the $12,000 transferred in the

direct skip. T’s transfer is divided into two

portions, a $10,000 portion with a zero

inclusion ratio and a $2,000 portion with an

applicable fraction of zero (0/$2,000 = 0) and

an inclusion ratio of one (1 ¥ 0 = 1).

§ 26.2642–2 Valuation.

(a) Lifetime transfers—(1) In general.

For purposes of determining the

denominator of the applicable fraction,

the value of property transferred during

life is its fair market value on the

effective date of the allocation of GST

exemption. In the case of a timely

allocation under § 26.2632–1(b)(2)(ii),

the denominator of the applicable

fraction is the fair market value of the

property as finally determined for

purposes of chapter 12.

(2) Special rule for late allocations

during life. If a transferor makes a late

allocation of GST exemption to a trust,

the value of the property transferred to

the trust is the fair market value of the

trust assets determined on the effective

date of the allocation of GST exemption.

Except as otherwise provided in this

paragraph (a)(2), if a transferor makes a
66916 Federal Register / Vol. 60, No. 248 / Wednesday, December 27, 1995 / Rules and Regulations

late allocation of GST exemption to a

trust, the transferor may, solely for

purposes of determining the fair market

value of the trust assets, elect to treat the

allocation as having been made on the

first day of the month during which the

late allocation is made (valuation date).

An election under this paragraph (a)(2)

is not effective with respect to a life

insurance policy or a trust holding a life

insurance policy, if the insured

individual has died. An allocation

subject to the election contained in this

paragraph (a)(2) is not effective until it

is actually filed with the Internal

Revenue Service. The election is made

by stating on the Form 709 on which the

allocation is made—

(i) That the election is being made;

(ii) The applicable valuation date; and

(iii) The fair market value of the trust

assets on the valuation date.

(b) Transfers at death—(1) In general.

Except as provided in paragraphs (b) (2)

and (3) of this section, in determining

the denominator of the applicable

fraction, the value of property included

in the decedent’s gross estate is its value

for purposes of chapter 11. In the case

of qualified real property with respect to

which the election under section 2032A

is made, the value of the property is the

value determined under section 2032A

provided the recapture agreement

described in section 2032A(d)(2) filed

with the Internal Revenue Service

specifically provides for the signatories’

consent to the imposition of, and

personal liability for, additional GST tax

in the event an additional estate tax is

imposed under section 2032A(c). See

§ 26.2642–4(a)(4). If the recapture

agreement does not contain these

provisions, the value of qualified real

property as to which the election under

section 2032A is made is the fair market

value of the property determined

without regard to the provisions of

section 2032A.

(2) Special rule for pecuniary

payments—(i) In general. If a pecuniary

payment is satisfied with cash, the

denominator of the applicable fraction

is the pecuniary amount. If property

other than cash is used to satisfy a

pecuniary payment, the denominator of

the applicable fraction is the pecuniary

amount only if payment must be made

with property on the basis of the value

of the property on—

(A) The date of distribution; or

(B) A date other than the date of

distribution, but only if the pecuniary

payment must be satisfied on a basis

that fairly reflects net appreciation and

depreciation (occurring between the

valuation date and the date of

distribution) in all of the assets from

which the distribution could have been

made.

(ii) Other pecuniary amounts payable

in kind. The denominator of the

applicable fraction with respect to any

property used to satisfy any other

pecuniary payment payable in kind is

the date of distribution value of the

property.

(3) Special rule for residual transfers

after payment of a pecuniary payment—

(i) In general. Except as otherwise

provided in this paragraph (b)(3), the

denominator of the applicable fraction

with respect to a residual transfer of

property after the satisfaction of a

pecuniary payment is the estate tax

value of the assets available to satisfy

the pecuniary payment reduced, if the

pecuniary payment carries appropriate

interest (as defined in paragraph (b)(4)

of this section), by the pecuniary

amount. The denominator of the

applicable fraction with respect to a

residual transfer of property after the

satisfaction of a pecuniary payment that

does not carry appropriate interest is the

estate tax value of the assets available to

satisfy the pecuniary payment reduced

by the present value of the pecuniary

payment. For purposes of this paragraph

(b)(3)(i), the present value of the

pecuniary payment is determined by

using—

(A) The interest rate applicable under

section 7520 at the death of the

transferor; and

(B) The period between the date of the

transferor’s death and the date the

pecuniary amount is paid.

(ii) Special rule for residual transfers

after pecuniary payments payable in

kind. The denominator of the applicable

fraction with respect to any residual

transfer after satisfaction of a pecuniary

payment payable in kind is the date of

distribution value of the property

distributed in satisfaction of the residual

transfer, unless the pecuniary payment

must be satisfied on the basis of the

value of the property on—

(A) The date of distribution; or

(B) A date other than the date of

distribution, but only if the pecuniary

payment must be satisfied on a basis

that fairly reflects net appreciation and

depreciation (occurring between the

date of death and the date of

distribution) in all of the assets from

which the distribution could have been

made.

(4) Appropriate interest—(i) In

general. For purposes of this section and

§ 26.2654–1 (relating to certain trusts

treated as separate trusts), appropriate

interest means that interest must be

payable from the date of death of the

transferor (or from the date specified

under applicable State law requiring the

payment of interest) to the date of

payment at a rate—

(A) At least equal to—

(1) The statutory rate of interest, if

any, applicable to pecuniary bequests

under the law of the State whose law

governs the administration of the estate

or trust; or

(2) If no such rate is indicated under

applicable State law, 80 percent of the

rate that is applicable under section

7520 at the death of the transferor; and

(B) Not in excess of the greater of—

(1) The statutory rate of interest, if

any, applicable to pecuniary bequests

under the law of the State whose law

governs the administration of the trust;

or

(2) 120 percent of the rate that is

applicable under section 7520 at the

death of the transferor.

(ii) Pecuniary payments deemed to

carry appropriate interest. For purposes

of this paragraph (b)(4), if a pecuniary

payment does not carry appropriate

interest, the pecuniary payment is

considered to carry appropriate interest

to the extent—

(A) The entire payment is made or

property is irrevocably set aside to

satisfy the entire pecuniary payment

within 15 months of the transferor’s

death; or

(B) The governing instrument or

applicable local law specifically

requires the executor or trustee to

allocate to the pecuniary payment a pro

rata share of the income earned by the

fund from which the pecuniary payment

is to be made between the date of death

of the transferor and the date of

payment. For purposes of paragraph

(b)(4)(ii)(A) of this section, property is

irrevocably set aside if it is segregated

and held in a separate account pending

distribution.

(c) Examples. The following examples

illustrate the provisions of this section:

Example 1. T transfers $100,000 to a

newly-created irrevocable trust on December

15, 1996. The trust provides that income is

to be paid to T’s child for 10 years. At the

end of the 10-year period, the trust principal

is to be paid to T’s grandchild. T does not

allocate any GST exemption to the trust on

the gift tax return reporting the transfer. On

November 15, 1997, T files a Form 709

allocating $50,000 of GST exemption to the

trust. Because the allocation was made on a

late filed return, the value of the property

transferred to the trust is determined on the

date the allocation is filed (unless an election

is made pursuant to paragraph (a)(2) of this

section to value the trust property as of the

first day of the month in which the allocation

document is filed with the Internal Revenue

Service). On November 15, 1997, the value of

the trust property is $150,000. Effective as of

November 15, 1997, the applicable fraction

with respect to the trust is .333 ($50,000 (the
Federal Register / Vol. 60, No. 248 / Wednesday, December 27, 1995 / Rules and Regulations 66917

amount of GST exemption allocated to the

trust) over $150,000 (the value of the trust

principal on the effective date of the GST

exemption allocation)), and the inclusion

ratio is .667 (1.0¥.333).

Example 2. The facts are the same as in

Example 1, except the value of the trust

property is $80,000 on November 15, 1997.

The applicable fraction is .625 ($50,000 over

$80,000) and the inclusion ratio is .375

(1.0¥.625).

Example 3. T transfers $100,000 to a

newly-created irrevocable trust on December

15, 1996. The trust provides that income is

to be paid to T’s child for 10 years. At the

end of the 10-year period, the trust principal

is to be paid to T’s grandchild. T does not

allocate any GST exemption to the trust on

the gift tax return reporting the transfer. On

November 15, 1997, T files a Form 709

allocating $50,000 of GST exemption to the

trust. T elects to value the trust principal on

the first day of the month in which the

allocation is made pursuant to the election

provided in paragraph (a)(2) of this section.

Because the late allocation is made in

November, the value of the trust is

determined as of November 1, 1997.

§ 26.2642–3 Special rule for charitable lead

annuity trusts.

(a) In general. In determining the

applicable fraction with respect to a

charitable lead annuity trust—

(1) The numerator is the adjusted

generation-skipping transfer tax

exemption (adjusted GST exemption);

and

(2) The denominator is the value of all

property in the trust immediately after

the termination of the charitable lead

annuity.

(b) Adjusted GST exemption defined.

The adjusted GST exemption is the

amount of GST exemption allocated to

the trust increased by an amount equal

to the interest that would accrue if an

amount equal to the allocated GST

exemption were invested at the rate

used to determine the amount of the

estate or gift tax charitable deduction,

compounded annually, for the actual

period of the charitable lead annuity. If

a late allocation is made to a charitable

lead annuity trust, the adjusted GST

exemption is the amount of GST

exemption allocated to the trust

increased by the interest that would

accrue if invested at such rate for the

period beginning on the date of the late

allocation and extending for the balance

of the actual period of the charitable

lead annuity. The amount of GST

exemption allocated to a charitable lead

annuity trust is not reduced even

though it is ultimately determined that

the allocation of a lesser amount of GST

exemption would have resulted in an

inclusion ratio of zero. For purposes of

chapter 13, a charitable lead annuity

trust is any trust providing an interest

in the form of a guaranteed annuity

described in § 25.2522(c)-3(c)(2)(vi) of

this chapter for which the transferor is

allowed a charitable deduction for

Federal estate or gift tax purposes.

(c) Example. The following example

illustrates the provisions of this section:

Example. T creates a charitable lead

annuity trust for a 10-year term with the

remainder payable to T’s grandchild. T

timely allocates an amount of GST exemption

to the trust which T expects will ultimately

result in a zero inclusion ratio. However, at

the end of the charitable lead interest,

because the property has not appreciated to

the extent T anticipated, the numerator of the

applicable fraction is greater than the

denominator. The inclusion ratio for the trust

is zero. No portion of the GST exemption

allocated to the trust is restored to T or to T’s

estate.

§ 26.2642–4 Redetermination of applicable

fraction.

(a) In general. The applicable fraction

for a trust is redetermined whenever

additional exemption is allocated to the

trust or when certain changes occur

with respect to the principal of the trust.

Except as otherwise provided in this

paragraph (a), the numerator of the

redetermined applicable fraction is the

sum of the amount of GST exemption

currently being allocated to the trust (if

any) plus the value of the nontax

portion of the trust, and the

denominator of the redetermined

applicable fraction is the value of the

trust principal immediately after the

event occurs. The nontax portion of a

trust is determined by multiplying the

value of the trust assets, determined

immediately prior to the event, by the

then applicable fraction.

(1) Multiple transfers to a single trust.

If property is added to an existing trust,

the denominator of the redetermined

applicable fraction is the value of the

trust immediately after the addition

reduced as provided in § 26.2642–1(c).

(2) Consolidation of separate trusts. If

separate trusts created by one transferor

are consolidated, a single applicable

fraction for the consolidated trust is

determined. The numerator of the

redetermined applicable fraction is the

sum of the nontax portions of each trust

immediately prior to the consolidation.

(3) Property included in transferor’s

gross estate. If the value of property

held in a trust created by the transferor,

with respect to which an allocation was

made at a time that the trust was not

subject to an ETIP, is included in the

transferor’s gross estate, the applicable

fraction is redetermined if additional

GST exemption is allocated to the

property. The numerator of the

redetermined applicable fraction is an

amount equal to the nontax portion of

the property immediately after the death

of the transferor increased by the

amount of GST exemption allocated by

the executor of the transferor’s estate to

the trust. If additional GST exemption is

not allocated to the trust, the applicable

fraction immediately before death is not

changed, if the trust was not subject to

an ETIP at the time GST exemption was

allocated to the trust. The denominator

of the applicable fraction is reduced to

reflect any federal or state, estate or

inheritance taxes paid from the trust.

(4) Imposition of recapture tax under

section 2032A—(i) If an additional

estate tax is imposed under section

2032A and if the section 2032A election

was effective (under § 26.2642–2(b)) for

purposes of the GST tax, the applicable

fraction with respect to the property is

redetermined as of the date of death of

the transferor. In making the

redetermination, any available GST

exemption not allocated at the death of

the transferor (or at a prior recapture

event) is automatically allocated to the

property. The denominator of the

applicable fraction is the fair market

value of the property at the date of the

transferor’s death reduced as provided

in § 26.2642–1(c) and further reduced by

the amount of the additional GST tax

actually recovered from the trust.

(ii) The GST tax imposed with respect

to any taxable termination, taxable

distribution, or direct skip occurring

prior to the recapture event is

recomputed based on the applicable

fraction as redetermined. Any

additional GST tax as recomputed is

due and payable on the date that is six

months after the event that causes the

imposition of the additional estate tax

under section 2032A. The additional

GST tax is remitted with Form 706–A

and is reported by attaching a statement

to Form 706–A showing the

computation of the additional GST tax.

(iii) The applicable fraction, as

redetermined under this section, is also

used in determining any GST tax

imposed with respect to GSTs occurring

after the date of the recapture event.

(b) Examples. The following examples

illustrate the principles of this section:

Example 1. Allocation of additional

exemption. T transfers $200,000 to an

irrevocable trust under which the income is

payable to T’s child, C, for life. Upon the

termination of the trust, the remainder is

payable to T’s grandchild, GC. At a time

when no ETIP exists with respect to the trust

property, T makes a timely allocation of

$100,000 of GST exemption, resulting in an

inclusion ratio of .50. Subsequently, when

the entire trust property is valued at

$500,000, T allocates an additional $100,000

of T’s unused GST exemption to the trust.

The inclusion ratio of the trust is recomputed

at that time. The numerator of the applicable

fraction is $350,000 ($250,000 (the nontax
66918 Federal Register / Vol. 60, No. 248 / Wednesday, December 27, 1995 / Rules and Regulations

portion as of the date of the allocation) plus

$100,000 (the GST exemption currently being

allocated)). The denominator is $500,000 (the

date of allocation fair market value of the

trust). The inclusion ratio is .30 (1 ¥ .70).

Example 2. Multiple transfers to a trust,

allocation both timely and late. On December

10, 1993, T transfers $10,000 to an

irrevocable trust that does not satisfy the

requirements of section 2642(c)(2). T makes

identical transfers to the trust on December

10, 1994, 1995, 1996, and on January 15,

1997. Immediately after the transfer on

January 15, 1997, the value of the trust

principal is $40,000. On January 14, 1998,

when the value of the trust principal is

$50,000, T allocates $30,000 of GST

exemption to the trust. T discloses the 1997

transfer on the Form 709 filed on January 14,

1998. Thus, T’s allocation is a timely

allocation with respect to the transfer in

1997, $10,000 of the allocation is effective as

of the date of that transfer, and, on and after

January 15, 1997, the inclusion ratio of the

trust is .75 (1 ¥ ($10,000/$40,000)). The

balance of the allocation is a late allocation

with respect to prior transfers to the trust and

is effective as of January 14, 1998. In

redetermining the inclusion ratio as of that

date, the numerator of the redetermined

applicable fraction is $32,500 ($12,500 (.25 ×

$50,000), the nontax portion of the trust on

January 14, 1998) plus $20,000 (the amount

of GST exemption allocated late to the trust).

The denominator of the new applicable

fraction is $50,000 (the value of the trust

principal at the time of the late allocation).

Example 3. Excess allocation. (i) T creates

an irrevocable trust for the benefit of T’s

child and grandchild in 1996 transferring

$50,000 to the trust on the date of creation.

T allocates no GST exemption to the trust on

the Form 709 reporting the transfer. On July

1, 1997 (when the value of the trust property

is $60,000), T transfers an additional $40,000

to the trust.

(ii) On April 15, 1998, when the value of

the trust is $150,000, T files a Form 709

reporting the 1997 transfer and allocating

$150,000 of GST exemption to the trust. The

allocation is a timely allocation of $40,000

with respect to the 1997 transfer and is

effective as of that date. Thus, the applicable

fraction for the trust as of July 1, 1997 is .40

($40,000/$100,000 ($40,000 + $60,000)).

(iii) The allocation is also a late allocation

of $90,000, the amount necessary to attain a

zero inclusion ratio on April 15, 1998,

computed as follows: $60,000 (the nontax

portion immediately prior to the allocation

(.40 × $150,000)) plus $90,000 (the additional

allocation necessary to produce a zero

inclusion ratio based on a denominator of

$150,000)/$150,000 equals one and, thus, an

inclusion ratio of zero. The balance of the

allocation, $20,000 ($150,000 less the timely

allocation of $40,000 less the late allocation

of $90,000) is void.

Example 4. Undisclosed transfer. (i) The

facts are the same as in Example 3, except

that on February 1, 1998 (when the value of

the trust is $150,000), T transfers an

additional $50,000 to the trust and the value

of the entire trust corpus on April 15, 1998

is $220,000. The Form 709 filed on April 15,

1998 does not disclose the 1998 transfer.

Under the rule in § 26.2632–1(b)(2)(ii), the

allocation is effective first as a timely

allocation to the 1997 transfer; second, as a

late allocation to the trust as of April 15,

1998; and, finally as a timely allocation to the

February 1, 1998 transfer. As of April 15,

1998, $55,000, a pro rata portion of the trust

assets, is considered to be the property

transferred to the trust on February 1, 1998

(($50,000/$200,000) × $220,000). The balance

of the trust, $165,000, represents prior

transfers to the trust.

(ii) As in Example 3, the allocation is a

timely allocation as to the 1997 transfer (and

the applicable fraction as of July 1, 1997 is

.40) and a late allocation as of 1998. The

amount of the late allocation is $99,000,

computed as follows: (.40 × $165,000 plus

$99,000)/$165,000 = one.

(iii) The balance of the allocation, $11,000

($150,000 less the timely allocation of

$40,000 less the late allocation of $99,000) is

a timely allocation as of February 1, 1998.

The applicable fraction with respect to the

trust, as of February 1, 1998, is .355,

computed as follows: $60,000 (the nontax

portion of the trust immediately prior to the

February 1, 1998 transfer (.40 × $150,000))

plus $11,000 (the amount of the timely

allocation to the 1998 transfer)/$200,000 (the

value of the trust on February 1, 1998, after

the transfer on that date) = $71,000/$200,000

= .355.

(iv) The applicable fraction with respect to

the trust, as of April 15, 1998, is .805

computed as follows: $78,100 (the nontax

portion immediately prior to the allocation

(.355 × $220,000)) plus $99,000 (the amount

of the late allocation)/ $220,000 = $177,100/

$220,000 = .805.

Example 5. Redetermination of inclusion

ratio on ETIP termination. (i) T transfers

$100,000 to an irrevocable trust. The trust

instrument provides that trust income is to be

paid to T for 9 years or until T’s prior death.

The trust principal is to be paid to T’s

grandchild, GC, on the termination of T’s

income interest. The trustee has the power to

invade trust principal for the benefit of GC

during the term of T’s income interest. The

trust is subject to an ETIP while T holds the

retained income interest. T files a timely

Form 709 reporting the transfer and allocates

$100,000 of GST exemption to the trust. In

year 4, when the value of the trust is

$200,000, the trustee distributes $15,000 to

GC. The distribution is a taxable distribution.

Because of the existence of the ETIP, the

inclusion ratio with respect to the taxable

distribution is determined immediately prior

to the occurrence of the GST. Thus, the

inclusion ratio applicable to the year 4 GST

is .50 (1 ¥ ($100,000/$200,000 = .50).

(ii) In year 5, when the value of the trust

is again $200,000, the trustee distributes

another $15,000 to GC. Because the trust is

still subject to the ETIP in year 5, the

inclusion ratio with respect to the year 5 GST

is again computed immediately prior to the

GST. In computing the new inclusion ratio,

the numerator of the applicable fraction is

reduced by the nontax portion of prior GSTs

occurring during the ETIP. Thus, the

numerator of the applicable fraction with

respect to the GST in year 5 is $92,500

($100,000 ¥ (.50 × $15,000)) and the

inclusion ratio applicable with respect to the

GST in year 5 is .537 (1 ¥ ($92,500/

$200,000) = .463). Any additional GST

exemption allocated on a timely ETIP return

with respect to the GST in year 5 is effective

immediately prior to the transfer.

§ 26.2642–5 Finality of inclusion ratio.

(a) Direct skips. The inclusion ratio

applicable to a direct skip becomes final

when no additional GST tax (including

additional GST tax payable as a result

of a cessation, etc. of qualified use

under section 2032A(c)) may be

assessed with respect to the direct skip.

(b) Other GSTs. With respect to

taxable distributions and taxable

terminations, the inclusion ratio for a

trust becomes final, on the later of—

(1) The expiration of the period for

assessment with respect to the first GST

tax return filed using that inclusion

ratio; (unless the trust is subject to an

election under section 2032A in which

case the applicable date under this

subsection is the expiration of the

period of assessment of any additional

GST tax due as a result of a cessation,

etc. of qualified use under section

2032A); or

(2) The expiration of the period for

assessment of Federal estate tax with

respect to the estate of the transferor.

For purposes of this paragraph (b)(2), if

an estate tax return is not required to be

filed, the period for assessment is

determined as if a return were required

to be filed and as if the return were

timely filed within the period

prescribed by section 6075(a).

§ 26.2652–1 Transferor defined; other

definitions.

(a) Transferor defined—(1) In general.

Except as otherwise provided in

paragraph (a)(3) of this section, the

individual with respect to whom

property was most recently subject to

Federal estate or gift tax is the transferor

of that property for purposes of chapter

13. An individual is treated as

transferring any property with respect to

which the individual is the transferor.

Thus, an individual may be a transferor

even though there is no transfer of

property under local law at the time the

Federal estate or gift tax applies. For

purposes of this paragraph, a surviving

spouse is the transferor of a qualified

domestic trust created by the deceased

spouse that is included in the surviving

spouse’s gross estate, provided the trust

is not subject to the election described

in § 26.2652–2 (reverse QTIP election).

A surviving spouse is also the transferor

of a qualified domestic trust created by

the surviving spouse pursuant to section

2056(d)(2)(B).

(2) Transfers subject to Federal estate

or gift tax. For purposes of this section,
Federal Register / Vol. 60, No. 248 / Wednesday, December 27, 1995 / Rules and Regulations 66919

a transfer is subject to Federal gift tax if

a gift tax is imposed under section

2501(a). A transfer is subject to Federal

estate tax if the value of the property is

includible in the decedent’s gross estate

as determined under section 2031 or

section 2103.

(3) Special rule for certain QTIP

trusts. Solely for purposes of chapter 13,

if a transferor of qualified terminable

interest property (QTIP) elects under

§ 26.2652–2(a) to treat the property as if

the QTIP election had not been made

(reverse QTIP election), the identity of

the transferor of the property is

determined without regard to the

application of sections 2044, 2207A,

and 2519.

(4) Exercise of certain nongeneral

powers of appointment. The exercise of

a power of appointment that is not a

general power of appointment (as

defined in section 2041(b)) is treated as

a transfer subject to Federal estate or gift

tax by the holder of the power if the

power is exercised in a manner that may

postpone or suspend the vesting,

absolute ownership, or power of

alienation of an interest in property for

a period, measured from the date of

creation of the trust, extending beyond

any specified life in being at the date of

creation of the trust plus a period of 21

years plus, if necessary, a reasonable

period of gestation (perpetuities period).

For purposes of this paragraph (a)(4),

the exercise of a power of appointment

that validly postpones or suspends the

vesting, absolute ownership, or power of

alienation of an interest in property for

a term of years that will not exceed 90

years (measured from the date of

creation of the trust) is not an exercise

that may extend beyond the perpetuities

period.

(5) Split-gift transfers. In the case of

a transfer with respect to which the

donor’s spouse makes an election under

section 2513 to treat the gift as made

one-half by the spouse, the electing

spouse is treated as the transferor of

one-half of the entire value of the

property transferred by the donor,

regardless of the interest the electing

spouse is actually deemed to have

transferred under section 2513. The

donor is treated as the transferor of onehalf of the value of the entire property.

See § 26.2632–1(c)(5) Example 3,

regarding allocation of GST exemption

with respect to split-gift transfers

subject to an ETIP.

(6) Examples. The following examples

illustrate the principles of this

paragraph (a):

Example 1. Identity of transferor. T

transfers $100,000 to a trust for the sole

benefit of T’s grandchild. The transfer is a

completed gift under § 25.2511–2 of this

chapter. Thus, for purposes of chapter 13, T

is the transferor of the $100,000. It is

immaterial that a portion of the transfer is

excluded from the total amount of T’s taxable

gift by reason of section 2503(b).

Example 2. Gift splitting and identity of

transferor. The facts are the same as in

Example 1, except T’s spouse, S, consents

under section 2513 to split the gift with T.

For purposes of chapter 13, S and T are each

treated as a transferor of $50,000 to the trust.

Example 3. Change of transferor on

subsequent transfer tax event. T transfers

$100,000 to a trust providing that all the net

trust income is to be paid to T’s spouse, S,

for S’s lifetime. T elects under section 2523(f)

to treat the transfer as a transfer of qualified

terminable interest property, and T does not

make the reverse QTIP election under section

2652(a)(3). On S’s death, the trust property is

included in S’s gross estate under section

2044. Thus, S becomes the transferor at the

time of S’s death.

Example 4. Effect of transfer of an interest

in trust on identity of the transferor. T

transfers $100,000 to a trust providing that all

of the net income is to be paid to T’s child,

C, for C’s lifetime. At C’s death, the trust

property is to be paid to T’s grandchild. C

transfers the income interest to X, an

unrelated party, in a transfer that is a

completed transfer for Federal gift tax

purposes. Because C’s transfer is a transfer of

a term interest in the trust that does not affect

the rights of other parties with respect to the

trust property, T remains the transferor with

respect to the trust.

Example 5. Effect of lapse of withdrawal

right on identity of transferor. T transfers

$10,000 to a new trust providing that the

trust income is to be paid to T’s child, C, for

C’s life and, on the death of C, the trust

principal is to be paid to T’s grandchild, GC.

The trustee has discretion to distribute

principal for GC’s benefit during C’s lifetime.

C has a right to withdraw $10,000 from the

trust for a 60-day period following the

transfer. Thereafter, the power lapses. C does

not exercise the withdrawal right. The

transfer by T is a completed transfer within

the meaning of § 25.2511–2 of this chapter

and, thus, T is treated as having transferred

the entire $10,000 to the trust. On the lapse

of the withdrawal right, C becomes a

transferor to the extent C is treated as having

made a completed transfer for purposes of

chapter 12. Therefore, except to the extent

that the amount with respect to which the

power of withdrawal lapses exceeds the

greater of $5,000 or 5% of the value of the

trust property, T remains the transferor of the

trust property for purposes of chapter 13.

Example 6. Effect of reverse QTIP election

on identity of the transferor. T establishes a

testamentary trust having a principal of

$500,000. Under the terms of the trust, all

trust income is payable to T’s surviving

spouse, S, during S’s lifetime. T’s executor

makes an election to treat the trust property

as qualified terminable interest property and

also makes the reverse QTIP election. For

purposes of chapter 13, T is the transferor

with respect to the trust. On S’s death, the

then full fair market value of the trust is

includible in S’s gross estate under section

2044. However, because of the reverse QTIP

election, S does not become the transferor

with respect to the trust; T continues to be

the transferor.

Example 7. Effect of reverse QTIP election

on constructive additions. The facts are the

same as in Example 6, except the inclusion

of the QTIP trust in S’s gross estate increased

the Federal estate tax liability of S’s estate by

$200,000. The estate does not exercise the

right of recovery from the trust granted under

section 2207A. Under local law, the

beneficiaries of S’s residuary estate (which

bears all estate taxes under the will) could

compel the executor to exercise the right of

recovery but do not do so. Solely for

purposes of chapter 13, the beneficiaries of

the residuary estate are not treated as having

made an addition to the trust by reason of

their failure to exercise their right of

recovery. Because of the reverse QTIP

election, for GST purposes, the trust property

is not treated as includible in S’s gross estate

and, under those circumstances, no right of

recovery exists.

Example 8. Effect of reverse QTIP election

on constructive additions. S, the surviving

spouse of T, dies testate. At the time of S’s

death, S was the beneficiary of a trust with

respect to which T’s executor made a QTIP

election under section 2056(b)(7). Thus, the

trust is includible in S’s gross estate under

section 2044. T’s executor also made the

reverse QTIP election with respect to the

trust. S’s will provides that all death taxes

payable with respect to the trust are payable

from S’s residuary estate. Since the transferor

of the property is determined without regard

to section 2044 and section 2207A, S is not

treated as making a constructive addition to

the trust by reason of the tax apportionment

clause in S’s will.

Example 9. Exercise of a nongeneral power

of appointment. On May 15, 1990, T

established an irrevocable trust under which

the trust income is to be paid to T’s child,

C, for life. C is given a testamentary power

to appoint the remainder in further trust for

the benefit of C’s issue. In default of C’s

exercise of the power, the remainder is to

pass to charity. C dies on February 3, 1997,

survived by two children and a sibling, S

(who was born prior to May 15, 1990). C

exercises the power in a manner that validly

extends the trust in favor of C’s issue until

the later of May 15, 2070 (80 years from the

date the trust was created), or the death of

S. C’s exercise of the power is considered a

transfer by C that is subject to the estate or

gift tax because it may extend the term of the

trust beyond the perpetuities period.

Example 10. Exercise of a nongeneral

power of appointment. The facts are the same

as in Example 9, except local law provides

that the effect of C’s exercise is to extend the

term of the trust until May 15, 2070, whether

or not S survives that date. C is not treated

as having made a transfer to the trust as a

result of the exercise of the power because

the exercise of the power does not extend the

term of the trust beyond a period of 90 years

measured from the creation of the trust. The

result would be the same if the effect of C’s

exercise is either to extend the term of the

trust until the death of S or to extend the

term of the trust until the first to occur of

May 15, 2070, or the death of S.
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Example 11. Split-gift transfers. T transfers

$100,000 to an inter vivos trust that provides

T with an annuity payable for ten years or

until T’s prior death. The annuity satisfies

the definition of a qualified interest under

section 2702(b). When the trust terminates,

the corpus is to be paid to T’s grandchild,

GC. T’s spouse, S, consents under section

2513 to have the gift treated as made one-half

by S. Under section 2513, only the actuarial

value of the gift to GC is eligible to be treated

as made one-half by S. However, because S

is treated as the donor of one-half of the gift

to GC, S becomes the transferor of one-half

of the entire trust ($50,000) for purposes of

Chapter 13.

(b) Trust defined—(1) In general. A

trust includes any arrangement (other

than an estate) that has substantially the

same effect as a trust. Thus, for example,

arrangements involving life estates and

remainders, estates for years, and

insurance and annuity contracts are

trusts. Generally, a transfer as to which

the identity of the transferee is

contingent upon the occurrence of an

event is a transfer in trust; however, a

transfer of property included in the

transferor’s gross estate, as to which the

identity of the transferee is contingent

upon an event that must occur within 6

months of the transferor’s death, is not

considered a transfer in trust solely by

reason of the existence of the

contingency.

(2) Examples. The following examples

illustrate the provisions of this

paragraph (b):

Example 1. Uniform gifts to minors

transfers. T transfers cash to an account in

the name of T’s child, C, as custodian for C’s

child, GC (who is a minor), under a state

statute substantially similar to the Uniform

Gifts to Minors Act. For purposes of chapter

13, the transfer to the custodial account is

treated as a transfer to a trust.

Example 2. Contingent transfers. T

bequeaths $200,000 to T’s child, C, provided

that if C does not survive T by more than 6

months, the bequest is payable to T’s

grandchild, GC. C dies 4 months after T. The

bequest is not a transfer in trust because the

contingency that determines the recipient of

the bequest must occur within 6 months of

T’s death. The bequest to GC is a direct skip.

Example 3. Contingent transfers. The facts

are the same as in Example 2, except C must

survive T by 18 months to take the bequest.

The bequest is a transfer in trust for purposes

of chapter 13, and the death of C is a taxable

termination.

(c) Trustee defined. The trustee of a

trust is the person designated as trustee

under local law or, if no such person is

so designated, the person in actual or

constructive possession of property held

in trust.

(d) Executor defined. For purposes of

chapter 13, the executor is the executor

or administrator of the decedent’s estate.

However, if no executor or

administrator is appointed, qualified or

acting within the United States, the

executor is the fiduciary who is

primarily responsible for payment of the

decedent’s debts and expenses. If there

is no such executor, administrator or

fiduciary, the executor is the person in

actual or constructive possession of the

largest portion of the value of the

decedent’s gross estate.

(e) Interest in trust. See § 26.2612–1(e)

for the definition of interest in trust.

§ 26.2652–2 Special election for qualified

terminable interest property.

(a) In general. If an election is made

to treat property as qualified terminable

interest property (QTIP) under section

2523(f) or section 2056(b)(7), the person

making the election may, for purposes

of chapter 13, elect to treat the property

as if the QTIP election had not been

made (reverse QTIP election). An

election under this section is

irrevocable. An election under this

section is not effective unless it is made

with respect to all of the property in the

trust to which the QTIP election applies.

See, however, § 26.2654–1(b)(1).

Property that qualifies for a deduction

under section 2056(b)(5) is not eligible

for the election under this section.

(b) Time and manner of making

election. An election under this section

is made on the return on which the

QTIP election is made. If a protective

QTIP election is made, no election

under this section is effective unless a

protective reverse QTIP election is also

made.

(c) Transitional rule. If a reverse QTIP

election is made with respect to a trust

prior to December 27, 1995, and GST

exemption has been allocated to that

trust, the transferor (or the transferor’s

executor) may elect to treat the trust as

two separate trusts, one of which has a

zero inclusion ratio by reason of the

transferor’s GST exemption previously

allocated to the trust. The separate trust

with the zero inclusion ratio consists of

that fractional share of the value of the

entire trust equal to the value of the

nontax portion of the trust under

§ 26.2642–4(a). The reverse QTIP

election is treated as applying only to

the trust with the zero inclusion ratio.

An election under this paragraph (c) is

made by attaching a statement to a copy

of the return on which the reverse QTIP

election was made under section

2652(a)(3). The statement must indicate

that an election is being made to treat

the trust as two separate trusts and must

identify the values of the two separate

trusts. The statement is to be filed in the

same place in which the original return

was filed and must be filed before June

24, 1996. A trust subject to the election

described in this paragraph is treated as

a trust that was created by two

transferors. See § 26.2654–1(a)(2) for

special rules involving trusts with

multiple transferors.

(d) Examples. The following examples

illustrate the provisions of this section:

Example 1. Special (reverse QTIP) election

under section 2652(a)(3). T transfers

$1,000,000 to a trust providing that all trust

income is to be paid to T’s spouse, S, for S’s

lifetime. On S’s death, the trust principal is

payable to GC, a grandchild of S and T. T

elects to treat all of the transfer as a transfer

of QTIP and also makes the reverse QTIP

election for all of the property. Because of the

reverse QTIP election, T continues to be

treated as the transferor of the property after

S’s death for purposes of chapter 13. A

taxable termination rather than a direct skip

occurs on S’s death.

Example 2. Election under transition rule.

In 1994, T died leaving $4 million in trust

for the benefit of T’s surviving spouse, S. On

January 16, 1995, T’s executor filed T’s Form

706 on which the executor elects to treat the

entire trust as qualified terminable interest

property. The executor also makes a reverse

QTIP election. The reverse QTIP election is

effective with respect to the entire trust even

though T’s executor could allocate only $1

million of GST exemption to the trust. T’s

executor may elect to treat the trust as two

separate trusts, one having a value of 25% of

the value of the single trust and an inclusion

ratio of zero, but only if the election is made

prior to June 24, 1996. If the executor makes

the transitional election, the other separate

trust, having a value of 75% of the value of

the single trust and an inclusion ratio of one,

is not treated as subject to the reverse QTIP

election.

Example 3. Denominator of the applicable

fraction of QTIP trust. T bequeaths

$1,500,000 to a trust in which T’s surviving

spouse, S, receives an income interest for life.

Upon the death of S, the property is to

remain in trust for the benefit of C, the child

of T and S. Upon C’s death, the trust is to

terminate and the trust property paid to the

descendants of C. The bequest qualifies for

the estate tax marital deduction under

section 2056(b)(7) as QTIP. The executor

does not make the reverse QTIP election

under section 2652(a)(3). As a result, S

becomes the transferor of the trust at S’s

death when the value of the property in the

QTIP trust is included in S’s gross estate

under section 2044. For purposes of

computing the applicable fraction with

respect to the QTIP trust upon S’s death, the

denominator of the fraction is reduced by any

Federal estate tax (whether imposed under

section 2001, 2101 or 2056A(b)) and State

death tax attributable to the trust property

that is actually recovered from the trust.

§ 26.2653–1 Taxation of multiple skips.

(a) General rule. If property is held in

trust immediately after a GST, solely for

purposes of determining whether future

events involve a skip person, the

transferor is thereafter deemed to

occupy the generation immediately
Federal Register / Vol. 60, No. 248 / Wednesday, December 27, 1995 / Rules and Regulations 66921

above the highest generation of any

person holding an interest in the trust

immediately after the transfer. If no

person holds an interest in the trust

immediately after the GST, the

transferor is treated as occupying the

generation above the highest generation

of any person in existence at the time of

the GST who then occupies the highest

generation level of any person who may

subsequently hold an interest in the

trust. See § 26.2612–1(e) for rules

determining when a person has an

interest in property held in trust.

(b) Examples. The following examples

illustrate the provisions of this section:

Example 1. T transfers property to an

irrevocable trust for the benefit of T’s

grandchild, GC, and great-grandchild, GGC.

During GC’s life, the trust income may be

distributed to GC and GGC in the trustee’s

absolute discretion. At GC’s death, the trust

property passes to GGC. Both GC and GGC

have an interest in the trust for purposes of

chapter 13. The transfer by T to the trust is

a direct skip, and the property is held in trust

immediately after the transfer. After the

direct skip, the transferor is treated as being

one generation above GC, the highest

generation individual having an interest in

the trust. Therefore, GC is no longer a skip

person and distributions to GC are not

taxable distributions. However, because GGC

occupies a generation that is two generations

below the deemed generation of T, GGC is a

skip person and distributions of trust income

to GGC are taxable distributions.

Example 2. T transfers property to an

irrevocable trust providing that the income is

to be paid to T’s child, C, for life. At C’s

death, the trust income is to be accumulated

for 10 years and added to principal. At the

end of the 10-year accumulation period, the

trust income is to be paid to T’s grandchild,

GC, for life. Upon GC’s death, the trust

property is to be paid to T’s great-grandchild,

GGC, or to GGC’s estate. A GST occurs at C’s

death. Immediately after C’s death and

during the 10-year accumulation period, no

person has an interest in the trust within the

meaning of section 2652(c) and § 26.2612–

1(e) because no one can receive current

distributions of income or principal.

Immediately after C’s death, T is treated as

occupying the generation above the

generation of GC (the trust beneficiary in

existence at the time of the GST who then

occupies the highest generation level of any

person who may subsequently hold an

interest in the trust). Thus, subsequent

income distributions to GC are not taxable

distributions.

§ 26.2654–1 Certain trusts treated as

separate trusts.

(a) Single trust treated as separate

trusts—(1) Substantially separate and

independent shares—(i) In general. If a

single trust consists solely of

substantially separate and independent

shares for different beneficiaries, the

share attributable to each beneficiary (or

group of beneficiaries) is treated as a

separate trust for purposes of chapter

13. The phrase ‘‘substantially separate

and independent shares’’ generally has

the same meaning as provided in

§ 1.663(c)–3 of this chapter. However, a

portion of a trust is not a separate share

unless such share exists from and at all

times after the creation of the trust. For

purposes of this paragraph (a)(1), a trust

is treated as created at the date of death

of the grantor if the trust is includible

in its entirety in the grantor’s gross

estate for Federal estate tax purposes.

Further, treatment of a single trust as

separate trusts under this paragraph

(a)(1) does not permit treatment of those

portions as separate trusts for purposes

of filing returns and payment of tax or

for purposes of computing any other tax

imposed under the Internal Revenue

Code. Also, additions to, and

distributions from, such trusts are

allocated pro rata among the separate

trusts, unless the governing instrument

expressly provides otherwise.

(ii) Certain pecuniary amounts. For

purposes of this section, if a person

holds the current right to receive a

mandatory (i.e., nondiscretionary and

noncontingent) payment of a pecuniary

amount at the death of the transferor

from an inter vivos trust that is

includible in the transferor’s gross

estate, or a testamentary trust, the

pecuniary amount is a separate and

independent share if—

(A) The trustee is required to pay

appropriate interest (as defined in

§ 26.2642–2(b)(4)(i) and (ii)) to the

person; or

(B) If the pecuniary amount is payable

in kind on the basis of value other than

the date of distribution value of the

assets, the trustee is required to allocate

assets to the pecuniary payment in a

manner that fairly reflects net

appreciation or depreciation in the

value of the assets in the fund available

to pay the pecuniary amount measured

from the date of death to the date of

payment.

(2) Multiple transferors with respect to

single trust—(i) In general. If there is

more than one transferor with respect to

a trust, the portions of the trust

attributable to the different transferors

are treated as separate trusts for

purposes of chapter 13. Treatment of a

single trust as separate trusts under this

paragraph (a)(2) does not permit

treatment of those portions as separate

trusts for purposes of filing returns and

payment of tax or for purposes of

computing any other tax imposed under

the Internal Revenue Code. Also,

additions to, and distributions from,

such trusts are allocated pro rata among

the separate trusts unless otherwise

expressly provided in the governing

instrument.

(ii) Addition by a transferor. If an

individual makes an addition to a trust

of which the individual is not the sole

transferor, the portion of the single trust

attributable to each separate trust is

determined by multiplying the fair

market value of the single trust

immediately after the contribution by a

fraction. The numerator of the fraction

is the value of the separate trust

immediately after the contribution. The

denominator of the fraction is the fair

market value of all the property in the

single trust immediately after the

transfer.

(3) Severance of a single trust. A

single trust treated as separate trusts

under paragraphs (a)(1) or (2) of this

section may be divided at any time into

separate trusts to reflect that treatment.

For this purpose, the rules of paragraph

(b)(1)(ii)(C) of this section apply with

respect to the severance and funding of

the severed trusts.

(4) Allocation of exemption—(i) In

general. With respect to a separate share

treated as a separate trust under

paragraph (a)(1) or (2) of this section, an

individual’s GST exemption is allocated

to the separate trust. See § 26.2632–1 for

rules concerning the allocation of GST

exemption.

(ii) Automatic allocation to direct

skips. If the transfer is a direct skip to

a trust that occurs during the

transferor’s lifetime and is treated as a

transfer to separate trusts under

paragraphs (a)(1) or (a)(2) of this section,

the transferor’s GST exemption not

previously allocated is automatically

allocated on a pro rata basis among the

separate trusts. The transferor may

prevent an automatic allocation of GST

exemption to a separate share of a single

trust by describing on a timely-filed

United States Gift (and GenerationSkipping Transfer) Tax Return (Form

709) the transfer and the extent to which

the automatic allocation is not to apply

to a particular share. See § 26.2632–1(b)

for rules for avoiding the automatic

allocation of GST exemption.

(5) Examples. The following examples

illustrate the principles of this section

(a):

Example 1. Separate shares as separate

trusts. T transfers $100,000 to a trust under

which income is to be paid in equal shares

for 10 years to T’s child, C, and T’s

grandchild, GC (or their respective estates).

The trust does not permit distributions of

principal during the term of the trust. At the

end of the 10-year term, the trust principal

is to be distributed to C and GC in equal

shares. The shares of C and GC in the trust

are separate and independent and, therefore,

are treated as separate trusts. The result
66922 Federal Register / Vol. 60, No. 248 / Wednesday, December 27, 1995 / Rules and Regulations

would not be the same if the trust permitted

distributions of principal unless the

distributions could only be made from a onehalf separate share of the initial trust

principal and the distributee’s future rights

with respect to the trust are correspondingly

reduced. T may allocate part of T’s GST

exemption under section 2632(a) to the share

held for the benefit of GC.

Example 2. Separate share rule

inapplicable. The facts are the same as in

Example 1, except the trustee holds the

discretionary power to distribute the income

in any proportion between C and GC during

the last year of the trust. The shares of C and

GC in the trust are not separate and

independent shares throughout the entire

term of the trust and, therefore, are not

treated as separate trusts for purposes of

chapter 13.

Example 3. Pecuniary payment as separate

share. T creates a lifetime revocable trust

providing that on T’s death $500,000 is

payable to T’s spouse, S, with the balance of

the principal to be held for the benefit of T’s

grandchildren. The value of the trust is

includible in T’s gross estate upon T’s death.

Under the terms of the trust, the payment to

S is required to be made in cash, and under

local law S is entitled to receive interest on

the payment at an annual rate of 6 percent,

commencing immediately upon T’s death.

For purposes of chapter 13, the trust is

treated as created at T’s death, and the

$500,000 payable to S from the trust is

treated as a separate share. The result would

be the same if the payment to S could be

satisfied using noncash assets at their value

on the date of distribution. Further, the result

would be the same if the decedent’s probate

estate poured over to the revocable trust on

the decedent’s death and was then

distributed in accordance with the terms of

the trust.

Example 4. Pecuniary payment not treated

as separate share. The facts are the same as

in Example 3, except the bequest to S is to

be paid in noncash assets valued at their

values as finally determined for Federal

estate tax purposes. Neither the trust

instrument nor local law requires that the

assets distributed in satisfaction of the

bequest fairly reflect net appreciation or

depreciation in all the assets from which the

bequest may be funded. S’s $500,000 bequest

is not treated as a separate share and the trust

is treated as a single trust for purposes of

chapter 13.

Example 5. Multiple transferors to single

trust. A transfers $100,000 to an irrevocable

generation-skipping trust; B simultaneously

transfers $50,000 to the same trust. As of the

time of the transfers, the single trust is

treated as two trusts for purposes of chapter

13. Because A contributed 2⁄3 of the value of

the initial corpus, 2⁄3 of the single trust

principal is treated as a separate trust created

by A. Similarly, because B contributed 1⁄3 of

the value of the initial corpus, 1⁄3 of the single

trust is treated as a separate trust created by

B. A or B may allocate their GST exemption

under section 2632(a) to the respective

separate trusts.

Example 6. Additional contributions. A

transfers $100,000 to an irrevocable

generation-skipping trust; B simultaneously

transfers $50,000 to the same trust. When the

value of the single trust has increased to

$180,000, A contributes an additional

$60,000 to the trust. At the time of the

additional contribution, the portion of the

single trust attributable to each grantor’s

separate trust must be redetermined. The

portion of the single trust attributable to A’s

separate trust immediately after the

contribution is 3⁄4 ((2/3 × $180,000) +

$60,000)/$240,000). The portion attributable

to B’s separate trust after A’s addition is 1⁄4.

Example 7. Distributions from a separate

share. The facts are the same as in Example

6, except that, after A’s second contribution,

$50,000 is distributed to a beneficiary of the

trust. Absent a provision in the trust

instrument that charges the distribution

against the contribution of either A or B, 3⁄4

of the distribution is treated as made from the

separate trust of which A is the transferor

and 1/4 from the separate trust of which B

is the transferor.

Example 8. Separate share rule

inapplicable. T creates an irrevocable trust

that provides the trustee with the

discretionary power to distribute income or

corpus to T’s children and grandchildren.

The trust provides that, when T’s youngest

child reaches age 21, the trust will be divided

into separate shares, one share for each child

of T. The income from a respective child’s

share will be paid to the child during the

child’s life with the remainder passing to

such child’s children (grandchildren of T).

The separate shares that come into existence

when the youngest child reaches age 21 will

not be recognized as separate trusts for

purposes of Chapter 13 because the shares

did not exist from and at all times after the

creation of the trust. Any allocation of GST

exemption to the trust either before or after

T’s youngest child reaches age 21 will apply

with respect to the entire trust. Thus, the

inclusion ratio will be the same with respect

to any distribution from the trust or the

separate shares. The result would be the

same if, the trust instrument provided that

the trust was to be divided into separate

trusts when T’s youngest child reached age

21.

(b) Division of a trust included in the

gross estate—(1) In general. The

severance of a trust that is included in

the transferor’s gross estate (or created

under the transferor’s will) into two or

more trusts is recognized for purposes of

chapter 13 if—

(i) The trust is severed pursuant to a

direction in the governing instrument

providing that the trust is to be divided

upon the death of the transferor; or

(ii) The governing instrument does

not require or otherwise direct

severance but the trust is severed

pursuant to discretionary authority

granted either under the governing

instrument or under local law; and

(A) The terms of each of the new

trusts provide for the same succession of

interests and beneficiaries as are

provided in the original trust;

(B) The severance occurs (or a

reformation proceeding, if required, is

commenced) prior to the date prescribed

for filing the Federal estate tax return

(including extensions actually granted)

for the estate of the transferor; and

(C) Either—

(1) The new trusts are severed on a

fractional basis. If severed on a

fractional basis, the separate trusts need

not be funded with a pro rata portion of

each asset held by the undivided trust.

The trusts may be funded on a nonpro

rata basis provided funding is based on

either the fair market value of the assets

on the date of funding or in a manner

that fairly reflects the net appreciation

or depreciation in the value of the assets

measured from the date of death to the

date of funding; or

(2) If the severance is required (by the

terms of the governing instrument) to be

made on the basis of a pecuniary

amount, the pecuniary payment is

satisfied in a manner that would meet

the requirements of paragraph (a)(1)(ii)

of this section if it were paid to an

individual.

(2) Special rule. If a court order

severing the trust has not been issued at

the time the Federal estate tax return is

filed, the executor must indicate on a

statement attached to the return that a

proceeding has been commenced to

sever the trust and describe the manner

in which the trust is proposed to be

severed. A copy of the petition or other

instrument used to commence the

proceeding must also be attached to the

return. If the governing instrument of a

trust or local law authorizes the

severance of the trust, a severance

pursuant to that authorization is treated

as meeting the requirement of paragraph

(b)(1)(ii)(B) of this section if the

executor indicates on the Federal estate

tax return that separate trusts will be

created (or funded) and clearly sets forth

the manner in which the trust is to be

severed and the separate trusts funded.

(3) Allocation of exemption. An

individual’s GST exemption under

§ 2632 may be allocated to the separate

trusts created pursuant to this section at

the discretion of the executor or trustee.

(4) Examples. The following examples

illustrate the provisions of this section

(b):

Example 1. Severance of single trust. T’s

will establishes a testamentary trust

providing that income is to be paid to T’s

spouse for life. At the spouse’s death, onehalf of the corpus is to be paid to T’s child,

C, or C’s estate (if C fails to survive the

spouse) and one-half of the corpus is to be

paid to T’s grandchild, GC, or GC’s estate (if

GC fails to survive the spouse). If the

requirements of paragraph (b) of this section

are otherwise satisfied, T’s executor may

divide the testamentary trust equally into two

separate trusts, one trust providing an

income interest to spouse for life with
Federal Register / Vol. 60, No. 248 / Wednesday, December 27, 1995 / Rules and Regulations 66923

remainder to C, and the other trust with an

income interest to spouse for life with

remainder to GC. Furthermore, if the

requirements of paragraph (b) of this section

are satisfied, the executor or trustee may

further divide the trust for the benefit of GC.

GST exemption may be allocated to any of

the divided trusts.

Example 2. Severance of revocable trust. T

creates an inter vivos revocable trust

providing that, at T’s death and after

payment of all taxes and administration

expenses, the remaining corpus will be

divided into two trusts. One trust, for the

benefit of T’s spouse, is to be funded with the

smallest amount that, if qualifying for the

marital deduction, will reduce the estate tax

to zero. The other trust, for the benefit of T’s

descendants, is to be funded with the balance

of the revocable trust corpus. The trust

corpus is includible in T’s gross estate. Each

trust is recognized as a separate trust for

purposes of chapter 13.

26.2662–1 Generation-skipping transfer

tax return requirements.

(a) In general. Chapter 13 imposes a

tax on generation-skipping transfers (as

defined in section 2611). The

requirements relating to the return of tax

depend on the type of generationskipping transfer involved. This section

contains rules for filing the required tax

return. Paragraph (c)(2) of this section

provides special rules concerning the

return requirements for generationskipping transfers pursuant to certain

trust arrangements (as defined in

paragraph (c)(2)(ii) of this section), such

as life insurance policies and annuities.

(b) Form of return—(1) Taxable

distributions. Form 706GS(D) must be

filed in accordance with its instructions

for any taxable distribution (as defined

in section 2612(b)). The trust involved

in a transfer described in the preceding

sentence must file Form 706GS(D–1) in

accordance with its instructions. A copy

of Form 706GS(D–1) shall be sent to

each distributee.

(2) Taxable terminations. Form

706GS(T) must be filed in accordance

with its instructions for any taxable

termination (as defined in section

2612(a)).

(3) Direct skip—(i) Inter vivos direct

skips. Form 709 must be filed in

accordance with its instructions for any

direct skip (as defined in section

2612(c)) that is subject to chapter 12 and

occurs during the life of the transferor.

(ii) Direct skips occurring at death—

(A) In general. Form 706 or Form

706NA must be filed in accordance with

its instructions for any direct skips (as

defined in section 2612(c)) that are

subject to chapter 11 and occur at the

death of the decedent.

(B) Direct skips payable from a trust.

Schedule R–1 of Form 706 must be filed

in accordance with its instructions for

any direct skip from a trust if such

direct skip is subject to chapter 11. See

paragraph (c)(2) of this section for

special rules relating to the person liable

for tax and required to make the return

under certain circumstances.

(c) Person liable for tax and required

to make return—(1) In general. Except

as otherwise provided in this section,

the following person is liable for the tax

imposed by section 2601 and must make

the required tax return—

(i) The transferee in a taxable

distribution (as defined in section

2612(b));

(ii) The trustee in the case of a taxable

termination (as defined in section

2612(a));

(iii) The transferor (as defined in

section 2652(a)(1)(B)) in the case of an

inter vivos direct skip (as defined in

section 2612(c));

(iv) The trustee in the case of a direct

skip from a trust or with respect to

property that continues to be held in

trust; or

(v) The executor in the case of a direct

skip (other than a direct skip described

in paragraph (c)(1)(iv) of this section) if

the transfer is subject to chapter 11. See

paragraph (c)(2) of this section for

special rules relating to direct skips to

or from certain trust arrangements (as

defined in paragraph (c)(2)(ii) of this

section).

(2) Special rule for direct skips

occurring at death with respect to

property held in trust arrangements—(i)

In general. In the case of certain

property held in a trust arrangement (as

defined in paragraph (c)(2)(ii) of this

section) at the date of death of the

transferor, the person who is required to

make the return and who is liable for

the tax imposed by chapter 13 is

determined under paragraphs (c)(2)(iii)

and (iv) of this section.

(ii) Trust arrangement defined. For

purposes of this section, the term trust

arrangement includes any arrangement

(other than an estate) which, although

not an explicit trust, has the same effect

as an explicit trust. For purposes of this

section, the term ‘‘explicit trust’’ means

a trust described in § 301.7701–4(a).

(iii) Executor’s liability in the case of

transfers with respect to decedents

dying on or after June 24, 1996 if the

transfer is less than $250,000. In the

case of a direct skip occurring at death,

the executor of the decedent’s estate is

liable for the tax imposed on that direct

skip by chapter 13 and is required to file

Form 706 or Form 706NA (and not

Schedule R–1 of Form 706) if, at the

date of the decedent’s death—

(A) The property involved in the

direct skip is held in a trust

arrangement; and

(B) The total value of the property

involved in direct skips with respect to

the trustee of that trust arrangement is

less than $250,000.

(iv) Executor’s liability in the case of

transfers with respect to decedents

dying prior to June 24, 1996 if the

transfer is less than $100,000. In the

case of a direct skip occurring at death

with respect to a decedent dying prior

to June 24, 1996, the rule in paragraph

(c)(2)(iii) of this section that imposes

liability upon the executor applies only

if the property involved in the direct

skip with respect to the trustee of the

trust arrangement, in the aggregate, is

less than $100,000.

(v) Executor’s right of recovery. In

cases where the rules of paragraphs

(c)(2)(iii) and (iv) of this section impose

liability for the generation-skipping

transfer tax on the executor, the

executor is entitled to recover from the

trustee (if the property continues to be

held in trust) or from the recipient of the

property (in the case of a transfer from

a trust), the generation-skipping transfer

tax attributable to the transfer.

(vi) Examples. The following

examples illustrate the application of

this paragraph (c)(2) with respect to

decedents dying on or after June 24,

1996:

Example 1. Insurance proceeds less than

$250,000. On August 1, 1997, T, the insured

under an insurance policy, died. The

proceeds ($200,000) were includible in T’s

gross estate for Federal estate tax purposes.

T’s grandchild GC, was named the sole

beneficiary of the policy. The insurance

policy is treated as a trust under section

2652(b)(1), and the payment of the proceeds

to GC is a transfer from a trust for purposes

of chapter 13. Therefore, the payment of the

proceeds to GC is a direct skip. Since the

proceeds from the policy ($200,000) are less

than $250,000, the executor is liable for the

tax imposed by chapter 13 and is required to

file Form 706.

Example 2. Aggregate insurance proceeds

of $250,000 or more. Assume the same facts

as in Example 1, except T is the insured

under two insurance policies issued by the

same insurance company. The proceeds

($150,000) from each policy are includible in

T’s gross estate for Federal estate tax

purposes. T’s grandchild, GC1, was named

the sole beneficiary of Policy 1, and T’s other

grandchild, GC2, was named the sole

beneficiary of Policy 2. GC1 and GC2 are skip

persons (as defined in section 2613).

Therefore, the payments of the proceeds are

direct skips. Since the total value of the

policies ($300,000) exceeds $250,000, the

insurance company is liable for the tax

imposed by chapter 13 and is required to file

Schedule R–1 of Form 706.

Example 3. Insurance proceeds of $250,000

or more held by insurance company. On

August 1, 1997, T, the insured under an

insurance policy, dies. The policy provides

that the insurance company shall make
66924 Federal Register / Vol. 60, No. 248 / Wednesday, December 27, 1995 / Rules and Regulations

monthly payments of $750 to GC, T’s

grandchild, for life with the remainder

payable to T’s great grandchild, GGC. The

face value of the policy is $300,000. Since the

proceeds continue to be held by the

insurance company (the trustee), the

proceeds are treated as if they were

transferred to a trust for purposes of chapter

13. The trust is a skip person (as defined in

section 2613(a)(2)) and the transfer is a direct

skip. Since the total value of the policy

($300,000) exceeds $250,000, the insurance

company is liable for the tax imposed by

chapter 13 and is required to file Schedule

R–1 of Form 706.

Example 4. Insurance proceeds less than

$250,000 held by insurance company.

Assume the same facts as in Example 3,

except the policy provides that the insurance

company shall make monthly payments of

$500 to GC and that the face value of the

policy is $200,000. The transfer is a transfer

to a trust for purposes of chapter 13.

However, since the total value of the policy

($200,000) is less than $250,000, the executor

is liable for the tax imposed by chapter 13

and is required to file Form 706.

Example 5. On August 1, 1997, A, the

insured under a life insurance policy, dies.

The insurance proceeds on A’s life that are

payable under policies issued by Company X

are in the aggregate amount of $200,000 and

are includible in A’s gross estate. Because the

proceeds are includible in A’s gross estate,

the generation-skipping transfer that occurs

upon A’s death, if any, will be a direct skip

rather than a taxable distribution or a taxable

termination. Accordingly, because the

aggregate amount of insurance proceeds with

respect to Company X is less than $250,000,

Company X may pay the proceeds without

regard to whether the beneficiary is a skip

person in relation to the decedent-transferor.

(3) Limitation on personal liability of

trustee. Except as provided in paragraph

(c)(3)(iii) of this section, a trustee is not

personally liable for any increases in the

tax imposed by section 2601 which is

attributable to the fact that—

(i) A transfer is made to the trust

during the life of the transferor for

which a gift tax return is not filed; or

(ii) The inclusion ratio with respect to

the trust, determined by reference to the

transferor’s gift tax return, is erroneous,

the actual inclusion ratio being greater

than the reported inclusion ratio.

(iii) This paragraph (c)(3) does not

apply if the trustee has or is deemed to

have knowledge of facts sufficient to

reasonably conclude that a gift tax

return was required to be filed or that

the inclusion ratio is erroneous. A

trustee is deemed to have knowledge of

such facts if the trustee’s agent,

employee, partner, or co-trustee has

knowledge of such facts.

(4) Exceptions—(i) Legal or mental

incapacity. If a distributee is legally or

mentally incapable of making a return,

the return may be made for the

distributee by the distributee’s guardian

or, if no guardian has been appointed,

by a person charged with the care of the

distributee’s person or property.

(ii) Returns made by fiduciaries. See

section 6012(b) for a fiduciary’s

responsibilities regarding the returns of

decedents, returns of persons under a

disability, returns of estates and trusts,

and returns made by joint fiduciaries.

(d) Time and manner of filing

return—(1) In general. Forms 706,

706NA, 706GS(D), 706GS(D–1),

706GS(T), 709, and Schedule R–1 of

Form 706 must be filed with the Internal

Revenue Service office with which an

estate or gift tax return of the transferor

must be filed. The return shall be filed—

(i) Direct skip. In the case of a direct

skip, on or before the date on which an

estate or gift tax return is required to be

filed with respect to the transfer (see

section 6075(b)(3)); and

(ii) Other transfers. In all other cases,

on or before the 15th day of the 4th

month after the close of the calendar

year in which such transfer occurs. See

paragraph (d)(2) of this section for an

exception to this rule when an election

is made under section 2624(c) to value

property included in certain taxable

terminations in accordance with section

2032.

(2) Exception for alternative valuation

of taxable termination. In the case of a

taxable termination with respect to

which an election is made under section

2624(c) to value property in accordance

with section 2032, a Form 706GS(T)

must be filed on or before the 15th day

of the 4th month after the close of the

calendar year in which the taxable

termination occurred, or on or before

the 10th month following the month in

which the death that resulted in the

taxable termination occurred, whichever

is later.

(e) Place for filing returns. See section

6091 for the place for filing any return,

declaration, statement, or other

document, or copies thereof, required by

chapter 13.

(f) Lien on property. The liens

imposed under sections 6324, 6324A,

and 6324B are applicable with respect

to the tax imposed under chapter 13.

Thus, a lien under section 6324 is

imposed in the amount of the tax

imposed by section 2601 on all property

transferred in a generation-skipping

transfer until the tax is fully paid or

becomes uncollectible by reason of

lapse of time. The lien attaches at the

time of the generation-skipping transfer

and is in addition to the lien for taxes

under section 6321.

§ 26.2663–1 Recapture tax under section

2032A.

See § 26.2642–4(a)(4) for rules relating

to the recomputation of the applicable

fraction and the imposition of

additional GST tax, if additional estate

tax is imposed under section 2032A.

§ 26.2663–2 Application of chapter 13 to

transfers by nonresidents not citizens of

the United States.

(a) In general. This section provides

rules for applying chapter 13 of the

Internal Revenue Code to transfers by a

transferor who is a nonresident not a

citizen of the United States (NRA

transferor). For purposes of this section,

an individual is a resident or citizen of

the United States if that individual is a

resident or citizen of the United States

under the rules of chapter 11 or 12 of

the Internal Revenue Code, as the case

may be. Every NRA transferor is allowed

a GST exemption of $1,000,000. See

§ 26.2632–1 regarding the allocation of

the exemption.

(b) Transfers subject to chapter 13—

(1) Direct skips. A transfer by a NRA

transferor is a direct skip subject to

chapter 13 only to the extent that the

transfer is subject to the Federal estate

or gift tax within the meaning of

§ 26.2652–1(a)(2). See § 26.2612–1(a) for

the definition of direct skip.

(2) Taxable distributions and taxable

terminations. Chapter 13 applies to a

taxable distribution or a taxable

termination to the extent that the initial

transfer of property to the trust by a

NRA transferor, whether during life or

at death, was subject to the Federal

estate or gift tax within the meaning of

§ 26.2652–1(a)(2). See § 26.2612–1(b) for

the definition of a taxable termination

and § 26.2612–1(c) for the definition of

a taxable distribution.

(c) Trusts funded in part with

property subject to chapter 13 and in

part with property not subject to chapter

13—(1) In general. If a single trust

created by a NRA transferor is in part

subject to chapter 13 under the rules of

paragraph (b) of this section and in part

not subject to chapter 13, the applicable

fraction with respect to the trust is

determined as of the date of the transfer,

except as provided in paragraph (c)(3) of

this section.

(i) Numerator of applicable fraction.

The numerator of the applicable fraction

is the sum of the amount of GST

exemption allocated to the trust (if any)

plus the value of the nontax portion of

the trust.

(ii) Denominator of applicable

fraction. The denominator of the

applicable fraction is the value of the

property transferred to the trust reduced

as provided in § 26.2642–1(c).

(2) Nontax portion of the trust. The

nontax portion of a trust is a fraction,

the numerator of which is the value of

property not subject to chapter 13
Federal Register / Vol. 60, No. 248 / Wednesday, December 27, 1995 / Rules and Regulations 66925

determined as of the date of the initial

completed transfer to the trust, and the

denominator of which is the value of the

entire trust. For example, T, a NRA

transferor, transfers property that has a

value of $1,000 to a generation-skipping

trust. Of the property transferred to the

trust, property having a value of $200 is

subject to chapter 13 and property

having a value of $800 is not subject to

chapter 13. The nontax portion is .8

($800 (the value of the property not

subject to chapter 13) over $1,000 (the

total value of the property transferred to

the trust).

(3) Special rule with respect to the

estate tax inclusion period. For

purposes of this section, the provisions

of § 26.2632–1(c), providing rules

applicable in the case of an estate tax

inclusion period (ETIP), apply only if

the property transferred by the NRA

transferor is subsequently included in

the transferor’s gross estate. If the

property is not subsequently included

in the gross estate, then the nontax

portion of the trust and the applicable

fraction are determined as of the date of

the initial transfer. If the property is

subsequently included in the gross

estate, then the nontax portion and the

applicable fraction are determined as of

the date of death.

(d) Examples. The following examples

illustrate the provisions of this section.

In each example T, a NRA, is the

transferor; C is T’s child; and GC is C’s

child and a grandchild of T:

Example 1. Direct transfer to skip person.

T transfers property to GC in a transfer that

is subject to Federal gift tax under chapter 12

within the meaning of § 26.2652–1(a)(2). At

the time of the transfer, C and GC are NRAs.

T’s transfer is subject to chapter 13 because

the transfer is subject to gift tax under

chapter 12.

Example 2. Transfers of both U.S. and

foreign situs property. (i) T’s will established

a testamentary trust for the benefit of C and

GC. The trust was funded with stock in a

publicly traded U.S. corporation having a

value on the date of T’s death of $100,000,

and property not situated in the United

States (and therefore not subject to estate tax)

having a value on the date of T’s death of

$400,000.

(ii) On a timely filed estate tax return

(Form 706NA), the executor of T’s estate

allocates $50,000 of GST exemption under

section 2632(a) to the trust. The numerator of

the applicable fraction is $450,000, the sum

of $50,000 (the amount of exemption

allocated to the trust) plus $400,000 (the

value of the nontax portion of the trust (4/

5 x $500,000)). The denominator is $500,000.

Hence, the applicable fraction with respect to

the trust is .9 ($450,000/$500,000), and the

inclusion ratio is .1 (1 - 9/10).

Example 3. Inter vivos transfer of U.S. and

foreign situs property to a trust and a timely

allocation of GST exemption. T establishes a

trust providing that trust income is payable

to T’s child for life and the remainder is to

be paid to T’s grandchild. T transfers

property to the trust that has a value of

$100,000 and is subject to chapter 13. T also

transfers property to the trust that has a value

of $300,000 but is not subject to chapter 13.

T allocates $100,000 of exemption to the trust

on a timely filed United States Gift (and

Generation-Skipping Transfer) Tax return

(Form 709). The applicable fraction with

respect to the trust is 1, determined as

follows: $300,000 (the value of the nontax

portion of the trust) plus $100,000 (the

exemption allocated to the trust)/ $400,000

(the total value of the property transferred to

the trust).

Example 4. Inter vivos transfer of U.S. and

foreign situs property to a trust and a late

allocation of GST exemption. (i) In 1996, T

transfers $500,000 of property to an inter

vivos trust the terms of which provide that

income is payable to C, for life, with the

remainder to GC. The property transferred to

the trust consists of property subject to

chapter 13 that has a value of $400,000 on

the date of the transfer and property not

subject to chapter 13 that has a value of

$100,000. T does not allocate GST exemption

to the trust. On the transfer date, the nontax

portion of the trust is .2 ($100,000/$500,000)

and the applicable fraction is also .2

determined as follows: $100,000 (the value of

the nontax portion of the trust)/$500,000 (the

value of the property transferred to the trust).

(ii) In 1999, when the value of the trust is

$800,000, T allocates $100,000 of GST

exemption to the trust. The applicable

fraction of the trust must be recomputed. The

numerator of the applicable fraction is

$260,000 ($100,000 (the amount of GST

exemption allocated to the trust)) plus

$160,000 (the value of the nontax portion of

the trust as of the date of allocation (.2 x

$800,000)). The denominator of the

applicable fraction is $800,000. Accordingly,

the applicable fraction with respect to the

trust after the allocation is .325 ($260,000/

$800,000) and the inclusion ratio is .675 (1

- .325).

Example 5. Taxable termination. The facts

are the same as in Example 4 except that, in

2006, when the value of the property is

$1,200,000, C dies and the trust corpus is

distributed to GC. The termination is a

taxable termination. If no further GST

exemption has been allocated to the trust, the

applicable fraction remains .325 and the

inclusion ratio remains .675.

Example 6. Estate Tax Inclusion Period. (i)

T transferred property to an inter vivos trust

the terms of which provided T with an

annuity payable for 10 years or until T’s prior

death. The annuity satisfies the definition of

a qualified interest under section 2702(b).

The trust also provided that, at the end of the

trust term, the remainder will pass to GC or

GC’s estate. The property transferred to the

trust consisted of property subject to chapter

13 that has a value of $100,000 and property

not subject to chapter 13 that has a value of

$400,000. T allocated $100,000 of GST

exemption to the trust. If T dies within the

10 year period, the value of the trust

principal will be subject to inclusion in T’s

gross estate to the extent provided in sections

2103 and 2104(b). Accordingly, the ETIP rule

under paragraph (c)(3) of this section applies.

(ii) In year 6 of the trust term, T died. At

T’s death, the trust corpus had a value of

$800,000, and $500,000 was includible in T’s

gross estate as provided in sections 2103 and

2104(b). Thus, $500,000 of the trust corpus

is subject to chapter 13 and $300,000 is not

subject to chapter 13. The $100,000 GST

exemption allocation is effective as of T’s

date of death. Also, the nontax portion of the

trust and the applicable fraction are

determined as of T’s date of death. In this

case, the nontax portion of the trust is .375,

determined as follows: $300,000 (the value of

the trust not subject to chapter 13)/$800,000

(the value of the trust). The numerator of the

applicable fraction is $400,000, determined

as follows: $100,000 (GST exemption

previously allocated to the trust) plus

$300,000 (the value of the nontax portion of

the trust). The denominator of the applicable

fraction is $800,000. Thus, the applicable

fraction with respect to the trust is .50, unless

additional exemption is allocated to the trust

by T’s executor or the automatic allocation

rules of § 26.2632–1(d)(2) apply.

Example 7. The facts are the same as in

Example 6 except that T survives the

termination date of T’s retained annuity and

the trust corpus is distributed to GC. Since

the trust was not included in T’s gross estate,

the ETIP rules do not apply. Accordingly, the

nontax portion of the trust and the applicable

fraction are determined as of the date of the

transfer to the trust. The nontax portion of

the trust is .80 ($400,000/$500,000). The

numerator of the applicable fraction is

$500,000 determined as follows: $100,000

(GST exemption allocated to the trust) plus

$400,000 (the value of the nontax portion of

the trust). Accordingly, the applicable

fraction is 1, and the inclusion ratio is zero.

(e) Transitional rule for allocations for

transfers made before December 27,

1995. If an NRA made a GST (inter vivos

or testamentary) after December 23,

1992, and before December 27, 1995 that

is subject to chapter 13 (within the

meaning of § 26.2663–2), the NRA will

be treated as having made a timely

allocation of GST exemption to the

transfer in a calendar year in the order

prescribed in section 2632(c). Thus, an

NRA’s unused GST exemption will

initially be treated as allocated to any

direct skips made during the calendar

year and then to any trusts with respect

to which the NRA made transfers during

the same calendar year and from which

a taxable distribution or a taxable

termination may occur. Allocations

within the above categories are made in

the order in which the transfers occur.

Allocations among simultaneous

transfers within the same category are

made pursuant to the principles of

section 2632(c)(2). This transitional

allocation rule will not apply if the NRA

transferor, or the executor of the NRA’s

estate, as the case may be, elected to

have an automatic allocation of GST

exemption not apply by describing on a

timely-filed Form 709 for the year of the
66926 Federal Register / Vol. 60, No. 248 / Wednesday, December 27, 1995 / Rules and Regulations

transfer, or a timely filed Form 706NA,

the details of the transfer and the extent

to which the allocation was not to

apply.

PART 301—PROCEDURE AND

ADMINISTRATION

Par. 2. The authority citation for part

301 continues to read in part as follows:

Authority: 26 U.S.C. 7805.* * *

Par. 3. Section 301.9100–7T is

amended as follows:

a. Paragraph (a)(1) is amended in the

table by removing both entries for

‘‘1431(a)’’.

b. Paragraph (a)(4)(i) is amended in

the table by removing the entry for

‘‘1431(a)’’.

c. Paragraph (a)(4)(iii) is revised to

read as follows:

§ 301.9100–7T Time and manner of making

certain elections under the Tax Reform Act

of 1986.

(a) * * *

(4) * * *

(iii) Freely revocable election. The

election described in this section under

Act section 311(d)(2) is freely revocable.

* * * * *

PART 602—OMB CONTROL NUMBERS

UNDER THE PAPERWORK

REDUCTION ACT

Par. 4. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 5. In § 602.101, paragraph (c) is

amended by adding entries in numerical

order in the table to read as follows:

§ 602.101 OMB Control numbers.

* * * * *

(c) * * *

CFR part or section where identified and described

Current

OMB control No.

* * * * *

26.2601–1 ................................... 1545–

0985

* * * * *

26.2632– ..................................... 1545–

0985

* * * * *

26.2642–1 ................................... 1545–

0985

26.2642–2 ................................... 1545–

0985

26.2642–3 ................................... 1545–

0985

26.2642–4 ................................... 1545–

0985

CFR part or section where identified and described

Current

OMB control No.

* * * * *

26.2652–2 ................................... 1545–

0985

* * * * *

26.2662–2 ................................... 1545–

0985

* * * * *

Approved: December 14, 1995

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

Leslie Samuels,

Assistant Secretary of the Treasury

[FR Doc. 95–30873 Filed 12–26–95; 8:45 am]

BILLING CODE 4830–01–U

DEPARTMENT OF COMMERCE

National Oceanic and Atmospheric

Administration

50 CFR Part 638

[Docket No. 950929242–5302–02; I.D.

091295A]

RIN 0648–AH74

Coral and Coral Reefs Off the Southern

Atlantic States; Amendment 3

AGENCY: National Marine Fisheries

Service (NMFS), National Oceanic and

Atmospheric Administration (NOAA),

Commerce.

ACTION: Final rule.

SUMMARY: NMFS issues this final rule to

implement Amendment 3 to the Fishery

Management Plan for Coral and Coral

Reefs off the Southern Atlantic States

(FMP). Amendment 3: Establishes an

aquacultured live rock permit system

applicable to the exclusive economic

zone off the southern Atlantic states;

prohibits chipping of aquacultured live

rock; prohibits octocoral harvest north

of Cape Canaveral, FL; and prohibits

anchoring of fishing vessels in the

Oculina Bank habitat area of particular

concern. In addition, NMFS amends the

regulations to correct and clarify certain

regulations, or conform them to current

standards. The intended effect is to

establish a management program for live

rock aquaculture and to protect fishery

habitat.

EFFECTIVE DATE: January 26, 1996.

FOR FURTHER INFORMATION CONTACT:

Georgia Cranmore, 813–570–5305.

SUPPLEMENTARY INFORMATION: The FMP

was prepared by the South Atlantic

Fishery Management Council (Council)

and is implemented through regulations

at 50 CFR part 638 under the authority

of the Magnuson Fishery Conservation

and Management Act (Magnuson Act).

With implementation of Amendment 3,

the title of the FMP is changed to the

Fishery Management Plan for Coral,

Coral Reefs, and Live/Hard Bottom

Habitats of the South Atlantic Region.

This title change reflects the Council’s

intent to manage and protect essential

live/hard bottom habitats as well as

coral resources.

Detailed descriptions and rationale for

the measures in Amendment 3 and for

additional changes proposed by NMFS

were included in the preamble to the

proposed rule (60 FR 53730, October 17,

1995) and are not repeated here.

Comments and Responses

During the public comment period

ending November 27, 1995, comments

were received from the U.S. Fish and

Wildlife Service (USFWS) and the

Center for Marine Conservation (CMC).

USFWS and CMC commended the

Council for its record on coral reef

protection and its recognition of the

importance of live rock to the marine

ecosystem. USFWS supported the coral

conservation and habitat protection

measures of Amendment 3.

Comment: CMC fully supports

Amendment 3, because it is expected to

minimize enforcement problems,

protect important live bottom

communities, and minimize further

damage to the Oculina Bank area. CMC

also urges NMFS not to delay

implementation of the aquaculture

permit system.

Response: Since a very similar permit

system is already in place for live rock

aquaculture in the Gulf of Mexico,

NMFS expects no delays in

implementing the aquaculture permit

provisions of Amendment 3, including

the special provisions for proposed sites

off the southern Atlantic states.

Changes From the Proposed Rule

In § 638.2, the note added to the

definition of ‘‘Allowable octocoral’’ to

clarify the distinction between

allowable octocoral and live rock is

removed. Since publication of the

proposed rule, a clarifying note was

added to 50 CFR part 638 via the final

rule implementing Amendment 3 to the

Fishery Management Plan for Coral and

Coral Reefs of the Gulf of Mexico (60 FR

56533, November 9, 1995); therefore, the

note is unnecessary.

Approval of Amendment 3

On December 15, 1995, the Director,

Southeast Region, NMFS (Regional

Director), approved Amendment 3.