Federal Register / Vol. 73, No. 148 / Thursday, July 31, 2008 / Rules and Regulations 44649 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 26 

[TD 9421] 

RIN 1545–BE70 

Severance of a Trust for GenerationSkipping Transfer (GST) Tax Purposes 

AGENCY: Internal Revenue Service (IRS), 

Department of the Treasury (Treasury). 

ACTION: Final regulations. 

SUMMARY: This document contains final 

regulations providing guidance 

regarding the generation-skipping 

transfer (GST) tax consequences of the 

severance of a trust in a manner that is 

effective under state law, but that does 

not meet the requirements of a qualified 

severance under section 2642(a)(3) of 

the Internal Revenue Code (Code). 

These final regulations also provide 

guidance regarding the GST tax 

consequences of a qualified severance of 

a trust with an inclusion ratio between 

zero and one into more than two 

resulting trusts. These final regulations 

also provide special funding rules 

applicable to the non-pro rata division 

of certain assets between or among 

resulting trusts. The regulations will 

affect trusts that are subject to the GST 

tax. 

DATES: Effective Date: The regulations 

are effective July 31, 2008. 

Applicability Date: For dates of 

applicability, see § 26.2642–6(k)(1). 

FOR FURTHER INFORMATION CONTACT: 

Mayer R. Samuels, (202) 622–3090 (not 

a toll-free number). 

SUPPLEMENTARY INFORMATION: 

Background 

Section 2642(a)(3) was added to the 

Code by the Economic Growth and Tax 

Relief Reconciliation Act of 2001 

(EGTRRA), Public Law 107–16 (115 

Stat. 38 (2001). Under section 

2642(a)(3), if a trust is divided into two 

or more trusts in a ‘‘qualified 

severance,’’ the separate trusts resulting 

from the severance (resulting trusts), 

which may have different inclusion 

ratios, will be recognized as separate 

trusts for GST tax purposes. (As used in 

this guidance, ‘‘resulting trust’’ has no 

relation to a resulting trust recognized 

under the common law of trusts and 

principles of equity.) Once the resulting 

trusts are recognized as separate trusts, 

the transferor’s lifetime GST tax 

exemption may be allocated separately 

to either trust. In addition, whether or 

not a GST taxable event occurs is 

determined separately for each resulting 

trust. 

On August 24, 2004, proposed 

regulations under section 2642(a)(3) 

regarding qualified severances were 

published in the Federal Register (REG–

145987–03, 2004–39 IRB 519, 69 FR 

51967). Final regulations were 

published on August 2, 2007 (TD 9348, 

2007–37 IRB 563, 72 FR 42291). The 

Treasury Department and IRS 

determined that certain comments 

received in response to the proposed 

regulations, and certain additional rules 

under section 2642(a)(3), should be 

addressed in a separate notice of 

proposed rulemaking. On August 2, 

2007, the Federal Register published a 

notice of proposed rulemaking (REG–

128843–05, 2007–37 IRB 587, 72 FR 

42340) addressing those comments and 

rules. The IRS received one submission 

containing several comments on the 

notice of proposed rulemaking. The 

comments contained in the submission 

are discussed below. No public hearing 

was requested or held. 

Explanation of Provisions and 

Summary of Comments 

Section 26.2642–6(d)(4) of the 

existing regulations provides that each 

of the trusts resulting from a qualified 

severance must be funded with a 

fraction or percentage of the original 

trust, and that the sum of those fractions 

or percentages must be one or one 

hundred percent, respectively. The 

existing regulations provide that this 

requirement may be satisfied by the 

funding of each resulting trust with that 

trust’s fraction or percentage share of 

each asset held by the original trust (a 

pro rata division). Section 26.2642–

6(d)(4) of the proposed regulations 

permits the funding of the resulting 

trusts on a non-pro rata basis, provided 

that a special funding rule is also 

satisfied. Specifically, this section of the 

proposed regulations provides that, if 

the assets of the original trust are 

divided between or among the resulting 

trusts on a non-pro rata basis, no 

discounts or other reductions from the 

value of the asset owned by the original 

trust, arising by reason of the division 

of the original trust’s interest in the 

asset between or among the resulting 

trusts, are permitted for purposes of 

determining the amount used to fund 

each resulting trust. Instead, solely for 

funding purposes, each resulting trust’s 

interest in the stock of a closely held 

corporation, partnership interest, or 

other asset must be valued by 

multiplying the fair market value of the 

asset held in the original trust as of the 

date of severance by the fractional or 

percentage interest in that asset being 

distributed to that resulting trust. Thus, 

for purposes of the requirements of a 

qualified severance, regardless of 

whether the funding is done on a pro 

rata basis, the cumulative value of the 

resulting trusts equals the value of the 

original trust. 

The commentators pointed out that 

funding pursuant to this rule would 

result in an allocation different from the 

allocation that would normally be 

obtained from funding based on the 

state law fair market value standard 

which would take the discounts into 

account. The commentators expressed 

concern that the resulting shift in 

beneficial interests between or among 

the resulting trusts could violate the 

trustee’s fiduciary duty of impartiality 

under applicable state law. Further, the 

commentators pointed out that the 

proposed rule could be avoided through 

the post-severance purchase and sale of 

assets between resulting trusts at fair 

market value. The commentators 

recommended an alternative funding 

rule under which the value of the 

original trust would be calculated as the 

sum of the fair market value of the 

assets to be held by the resulting trusts. 

This recommendation was not 

adopted in the final regulations. It is 

difficult to see how the fiduciary duty 

of impartiality is challenged more by 

this funding rule than by a pro rata 

division of each asset of the original 

trust. The funding rule in the proposed 

regulations was intended to facilitate 

the funding of the resulting trusts 

without the cost or need for review of 

appraisals of each severed interest, and 

thus to improve the administrability of 

the severance provisions. This funding 

rule produces a bright line test, the same 

result whether or not the trust assets are 

divided on a pro rata basis, and 

recognizes that in many circumstances, 

where a trust is severed for tax purposes 

into two identical trusts with the same 

or related beneficiaries, any closely held 

stock or partnership units divided 

between the two resulting trusts are 

likely to be sold as a unit without any 

actual reduction in value that may be 

reflected in the claimed discounts. Any 

use of post-severance sales between 

resulting trusts to avoid these funding 

rules may constitute mere steps in a prearranged transaction. 

The commentators pointed out that 

the nonqualified severance illustrated in 

§ 26.2642–6(j), Example 3, of the 

existing regulations will result in a 

taxable event for GST tax purposes (that 

is, a taxable termination or taxable 

distribution) if that severance occurs on 

or after the proposed regulations are 

adopted as final. This is because, under 

the proposed regulations, the severed 


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44650 Federal Register / Vol. 73, No. 148 / Thursday, July 31, 2008 / Rules and Regulations 

trust is treated as a separate trust for 

GST tax purposes. Accordingly, 

cautionary language has been added to 

this example to the effect that a GST 

taxable event will result as a 

consequence of the severance. 

It was determined that § 26.2642–6(j), 

Example 12 of the proposed regulations 

addresses the same issue covered in 

Example 8 of § 26.2654–1(a)(5). 

Therefore, Example 12 has been 

removed from the final regulations and 

the examples have been renumbered 

accordingly. 

As requested by the commentators, a 

new example, § 26.2642–6(j), Example 

13, has been added to confirm that a 

trust resulting from a nonqualified 

severance may subsequently be severed 

in a qualified severance. 

The commentators noted that the 

proposed regulations under § 26.2654–

1(a)(1)(iii) address the treatment of 

severances resulting in separate trusts 

that are required under the terms of a 

trust instrument (mandatory severances) 

but that are neither severances 

otherwise recognized under section 

2654 nor qualified severances under 

section 2642. The proposed regulations 

conclude that the separate shares or 

trusts resulting from such a severance, 

if recognized as separate trusts under 

state law, will be recognized as separate 

for GST tax purposes. The 

commentators questioned why the 

proposed changes to the regulations 

under section 2654 must address those 

severances that result in separate trusts 

when this issue is already addressed in 

§ 26.2642–6(h) of the proposed 

regulations dealing with nonqualified 

severances. Section 26.2654–1(a)(1)(iii) 

was intended to address only mandatory 

severances that, as with the other types 

of severances covered by § 26.2654–1(a), 

are dictated by the terms of the trust. On 

the other hand, § 26.2642–6(h) 

addresses discretionary severances, that 

is, severances that are elective and 

within the discretion of the trustee. The 

severances described in § 26.2654–1 are 

governed by that section. Therefore, the 

proposed addition to this section has 

not been removed. 

The proposed regulations under 

section 2654 state a general rule that 

separate shares or trusts resulting from 

a mandatory severance, that are 

recognized as separate trusts for GST tax 

purposes, will not be treated as separate 

trusts for purposes of filing income tax 

returns or calculating any other taxes. 

The comments noted that this statement 

should not apply to shares or trusts that 

are recognized as separate trusts under 

local law. Rather, this statement should 

apply only to separate shares created 

within a single trust that are not 

recognized under local law as separate 

trusts. The final regulations reflect this 

change. 

Special Analyses 

It has been determined that this 

Treasury decision is not a significant 

regulatory action as defined in 

Executive Order 12866. Therefore, a 

regulatory assessment is not required. It 

also has been determined that section 

553(b) of the Administrative Procedure 

Act (5 U.S.C. chapter 5) applies only to 

§ 26.2642–6(d)(7)(iii) of these 

regulations. It is hereby certified that 

this provision will not have a significant 

economic impact on a substantial 

number of small entities. Accordingly, a 

Regulatory Flexibility Analysis is not 

required. This provision directly affects 

individuals, not entities. Because the 

remaining sections of these regulations 

do not impose on small entities a 

collection of information requirement, 

the Regulatory Flexibility Act (5 U.S.C. 

chapter 6) does not apply. Pursuant to 

section 7805(f) of the Code, the notice 

of proposed rulemaking preceding these 

regulations was submitted to the Small 

Business Administration for comment 

on their impact on small business. 

Drafting Information 

The principal author of these final 

regulations is Mayer R. Samuels, Office 

of the Associate Chief Counsel 

(Passthroughs and Special Industries), 

IRS. Other personnel from the IRS and 

Treasury participated in their 

development. 

List of Subjects in 26 CFR Part 26 

Estate taxes, Reporting and 

recordkeeping requirements. 

Adoption of Amendments to the 

Regulations 

■ Accordingly, 26 CFR part 26 is 

amended as follows: 

PART 26—GENERATION-SKIPPING 

TRANSFER TAX REGULATIONS 

UNDER THE TAX REFORM ACT OF 

1986 

■ Paragraph 1. The authority citation 

for part 26 continues to read in part as 

follows: 

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

■ Par. 2. In § 26.2600–1, the table of 

contents is amended by adding the entry 

for § 26.2642–6(h) to read as follows: 

§ 26.2600–1 Table of contents. 

* * * * * 

§ 26.2642–6 Qualified severance. 

* * * * * 

(h) Treatment of trusts resulting from 

a severance that is not a qualified 

severance. 

* * * * * 

■ Par. 3. Section 26.2642–6 is amended 

as follows: 

■ 1. Paragraphs (d)(4) and (d)(7) are 

revised. 

■ 2. Paragraph (h) is added. 

■ 3. Paragraph (j) Example 3 is revised. 

■ 4. Paragraph (j) Examples 6, 9, 12, and 

13 are added. 

■ 5. Paragraph (k)(1) is revised. 

The additions and revisions read as 

follows: 

§ 26.2642–6 Qualified severance. 

* * * * * 

(d) * * * 

(4) The single trust (original trust) is 

severed on a fractional basis, such that 

each new trust (resulting trust) is 

funded with a fraction or percentage of 

the original trust, and the sum of those 

fractions or percentages is one or one 

hundred percent, respectively. For this 

purpose, the fraction or percentage may 

be determined by means of a formula 

(for example, that fraction of the trust 

the numerator of which is equal to the 

transferor’s unused GST tax exemption, 

and the denominator of which is the fair 

market value of the original trust’s 

assets on the date of severance). The 

severance of a trust based on a 

pecuniary amount does not satisfy this 

requirement. For example, the severance 

of a trust is not a qualified severance if 

the trust is divided into two trusts, with 

one trust to be funded with $1,500,000 

and the other trust to be funded with the 

balance of the original trust’s assets. 

With respect to the particular assets to 

be distributed to each separate trust 

resulting from the severance, each such 

trust may be funded with the 

appropriate fraction or percentage (pro 

rata portion) of each asset held by the 

original trust. Alternatively, the assets 

may be divided among the resulting 

trusts on a non-pro rata basis, based on 

the fair market value of the assets on the 

date of severance. However, if a 

resulting trust is funded on a non-pro 

rata basis, each asset received by a 

resulting trust must be valued, solely for 

funding purposes, by multiplying the 

fair market value of the asset held in the 

original trust as of the date of severance 

by the fraction or percentage of that 

asset received by that resulting trust. 

Thus, the assets must be valued without 

taking into account any discount or 

premium arising from the severance, for 

example, any valuation discounts that 

might arise because the resulting trust 

receives less than the entire interest 


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held by the original trust. See paragraph 

(j), Example 6 of this section. 

* * * * * 

(7)(i) In the case of a qualified 

severance occurring after GST tax 

exemption has been allocated to the 

trust (whether by an affirmative 

allocation, a deemed allocation, or an 

automatic allocation pursuant to the 

rules contained in section 2632), if the 

trust has an inclusion ratio as defined in 

§ 26.2642–1 that is greater than zero and 

less than one, then either paragraph 

(d)(7)(ii) or (iii) of this section must be 

satisfied. 

(ii) The trust is severed initially into 

only two resulting trusts. One resulting 

trust must receive that fractional share 

of the total value of the original trust as 

of the date of severance that is equal to 

the applicable fraction, as defined in 

§ 26.2642–1(b) and (c), used to 

determine the inclusion ratio of the 

original trust immediately before the 

severance. The other resulting trust 

must receive that fractional share of the 

total value of the original trust as of the 

date of severance that is equal to the 

excess of one over the fractional share 

described in the preceding sentence. 

The trust receiving the fractional share 

equal to the applicable fraction shall 

have an inclusion ratio of zero, and the 

other trust shall have an inclusion ratio 

of one. If the applicable fraction with 

respect to the original trust is .50, then, 

with respect to the two equal trusts 

resulting from the severance, the trustee 

may designate which of the resulting 

trusts will have an inclusion ratio of 

zero and which will have an inclusion 

ratio of one. Each separate trust 

resulting from the severance then may 

be further divided in accordance with 

the rules of this section. See paragraph 

(j), Example 7, of this section. 

(iii) The trust is severed initially into 

more than two resulting trusts. One or 

more of the resulting trusts in the 

aggregate must receive that fractional 

share of the total value of the original 

trust as of the date of severance that is 

equal to the applicable fraction used to 

determine the inclusion ratio of the 

original trust immediately before the 

severance. The trust or trusts receiving 

such fractional share shall have an 

inclusion ratio of zero, and each of the 

other resulting trust or trusts shall have 

an inclusion ratio of one. (If, however, 

two or more of the resulting trusts each 

receives the fractional share of the total 

value of the original trust equal to the 

applicable fraction, the trustee may 

designate which of those resulting trusts 

will have an inclusion ratio of zero and 

which will have an inclusion ratio of 

one.) The resulting trust or trusts with 

an inclusion ratio of one must receive in 

the aggregate that fractional share of the 

total value of the original trust as of the 

date of severance that is equal to the 

excess of one over the fractional share 

described in the second sentence of this 

paragraph. See paragraph (j), Example 9, 

of this section. 

* * * * * 

(h) Treatment of trusts resulting from 

a severance that is not a qualified 

severance. Trusts resulting from a 

severance (other than a severance 

recognized for GST tax purposes under 

§ 26.2654–1) that does not meet the 

requirements of a qualified severance 

under paragraph (b) of this section will 

be treated, after the date of severance, as 

separate trusts for purposes of the GST 

tax, provided that the trusts resulting 

from such severance are recognized as 

separate trusts under applicable state 

law. The post-severance treatment of the 

resulting trusts as separate trusts for 

GST tax purposes generally permits the 

allocation of GST tax exemption, the 

making of various elections permitted 

for GST tax purposes, and the 

occurrence of a taxable distribution or 

termination with regard to a particular 

resulting trust, with no GST tax impact 

on any other trust resulting from that 

severance. Each trust resulting from a 

severance described in this paragraph 

(h), however, will have the same 

inclusion ratio immediately after the 

severance as that of the original trust 

immediately before the severance. (See 

§ 26.2654–1 for the inclusion ratio of 

each trust resulting from a severance 

described in that section.) Further, any 

trust resulting from a nonqualified 

severance may be severed subsequently, 

pursuant to a qualified severance 

described in this § 26.2642–6. 

* * * * * 

(j) * * * 

Example 3. Severance based on actuarial 

value of beneficial interests. In 2004, T 

establishes Trust, an irrevocable trust 

providing that income is to be paid to T’s 

child C during C’s lifetime. Upon C’s death, 

Trust is to terminate and the assets of Trust 

are to be paid to GC, C’s child, if living, or, 

if GC is not then living, to GC’s estate. T 

properly elects, under section 2632(c)(5), not 

to have the automatic allocation rules 

contained in section 2632(c) apply with 

respect to T’s transfers to Trust, and T does 

not otherwise allocate GST tax exemption 

with respect to Trust. Thus, Trust has an 

inclusion ratio of one. In 2009, the trustee of 

Trust, pursuant to applicable state law, 

divides Trust into two separate trusts, Trust 

1 for the benefit of C (and on C’s death to C’s 

estate), and Trust 2 for the benefit of GC (and 

on GC’s death to GC’s estate). The document 

severing Trust directs that Trust 1 is to be 

funded with an amount equal to the actuarial 

value of C’s interest in Trust prior to the 

severance, determined under section 7520 of 

the Internal Revenue Code. Similarly, Trust 

2 is to be funded with an amount equal to 

the actuarial value of GC’s interest in Trust 

prior to the severance, determined under 

section 7520. Trust 1 and Trust 2 do not 

provide for the same succession of interests 

as provided under the terms of the original 

trust. Therefore, the severance is not a 

qualified severance. Furthermore, because 

the severance results in no non-skip person 

having an interest in Trust 2, Trust 2 

constitutes a skip person under section 2613 

and, therefore, the severance results in a 

taxable termination subject to GST tax. 

* * * * * 

Example 6. Funding of severed trusts on a 

non-pro rata basis. (i) T’s will establishes an 

irrevocable trust (Trust) for the benefit of T’s 

descendants. As a result of the allocation of 

GST tax exemption, the applicable fraction 

with respect to Trust is .60 and Trust’s 

inclusion ratio is .40 [1–.60]. Pursuant to 

authority granted under applicable state law, 

on August 1, 2008, the trustee executes a 

document severing Trust into two trusts, 

Trust 1 and Trust 2, each of which is 

identical to Trust. The instrument of 

severance provides that the severance is 

intended to qualify as a qualified severance 

within the meaning of section 2642(a)(3) and 

designates August 3, 2008, as the date of 

severance (within the meaning of paragraph 

(d)(3) of this section). The instrument further 

provides that Trust 1 and Trust 2 are to be 

funded on a non-pro rata basis with Trust 1 

funded with assets having a fair market value 

on the date of severance equal to 40% of the 

value of Trust’s assets on that date and Trust 

2 funded with assets having a fair market 

value equal to 60% of the value of Trust’s 

assets on that date. The fair market value of 

the assets used to fund each trust is to be 

determined in compliance with the 

requirements of paragraph (d)(4) of this 

section. 

(ii) On August 3, 2008, the fair market 

value of the Trust assets totals $4,000,000, 

consisting of 52% of the outstanding 

common stock in Company, a closely-held 

corporation, valued at $3,000,000 and 

$1,000,000 in cash and marketable securities. 

Trustee proposes to divide the Company 

stock equally between Trust 1 and Trust 2, 

and thus transfer 26% of the Company stock 

to Trust 1 and 26% of the stock to Trust 2. 

In addition, the appropriate amount of cash 

and marketable securities will be distributed 

to each trust. In accordance with paragraph 

(d)(4) of this section, for funding purposes, 

the interest in the Company stock distributed 

to each trust is valued as a pro rata portion 

of the value of the 52% interest in Company 

held by Trust before severance, without 

taking into account, for example, any 

valuation discount that might otherwise 

apply in valuing the noncontrolling interest 

distributed to each resulting trust. 

(iii) Accordingly, for funding purposes, 

each 26% interest in Company stock 

distributed to Trust 1 and Trust 2 is valued 

at $1,500,000 (.5 × $3,000,000). Therefore, 

Trust 1, which is to be funded with 

$1,600,000 (.40 × $4,000,000), receives 

$100,000 in cash and marketable securities 

valued as of August 3, 2008, in addition to 


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the Company stock, and Trust 2, which is to 

be funded with $2,400,000 (.60 × $4,000,000), 

receives $900,000 in cash and marketable 

securities in addition to the Company stock. 

Therefore, the severance is a qualified 

severance, provided that all other 

requirements of section 2642(a)(3) and this 

section are satisfied. 

* * * * * 

Example 9. Regulatory qualified severance. 

(i) In 2004, T establishes an inter vivos 

irrevocable trust (Trust) providing that trust 

income is to be paid annually in equal shares 

to T’s children, A and B, for 10 years. Trust 

provides that the trustee has discretion to 

make additional distributions of principal to 

A and B during the 10-year term without 

adjustments to their shares of income or the 

trust remainder. If either (or both) dies prior 

to the expiration of the 10-year term, the 

deceased child’s share of trust income is to 

be paid to the child’s then living 

descendants, per stirpes, for the balance of 

the trust term. At the expiration of the 10- 

year term, the corpus is to be distributed 

equally to A and B; if A and B (or either or 

them) is not then living, then such decedent’s 

share is to be distributed instead to such 

decedent’s then living descendants, per 

stirpes. T allocates GST tax exemption to 

Trust such that Trust’s applicable fraction is 

.25 and its inclusion ratio is .75. 

(ii) In 2006, pursuant to applicable state 

law, the trustee severs the trust into three 

trusts: Trust 1, Trust 2, and Trust 3. The 

instrument severing Trust provides that Trust 

1 is to receive 50% of Trust’s assets, Trust 

2 is to receive 25% of Trust’s assets, and 

Trust 3 is to receive 25% of Trust’s assets. 

All three resulting trusts are identical to 

Trust, except that each has different 

beneficiaries: A and A’s issue are designated 

as the beneficiaries of Trust 1, and B and B’s 

issue are designated as the beneficiaries of 

Trust 2 and Trust 3. The severance 

constitutes a qualified severance, provided 

that all other requirements of section 

2642(a)(3) and this section are satisfied. Trust 

1 will have an inclusion ratio of 1. Because 

both Trust 2 and Trust 3 have each received 

the fractional share of Trust’s assets equal to 

Trust’s applicable fraction of .25, trustee 

designates that Trust 2 will have an inclusion 

ratio of one and that Trust 3 will have an 

inclusion ratio of zero. 

* * * * * 

Example 12. Other severance that does not 

meet the requirements of a qualified 

severance. (i) In 2004, T establishes an 

irrevocable inter vivos trust (Trust) providing 

that Trust income is to be paid to T’s 

children, A and B, in equal shares for their 

joint lives. Upon the death of the first to die 

of A and B, all Trust income will be paid to 

the survivor of A and B. At the death of the 

survivor, the corpus is to be distributed in 

equal shares to T’s grandchildren, W and X 

(with any then-deceased grandchild’s share 

being paid in accordance with that 

grandchild’s testamentary general power of 

appointment). W is A’s child and X is B’s 

child. T elects under section 2632(c)(5) not 

to have the automatic allocation rules 

contained in section 2632(c) apply with 

respect to T’s transfers to Trust, but T 

allocates GST tax exemption to Trust 

resulting in Trust having an inclusion ratio 

of .30. 

(ii) In 2009, the trustee of Trust, as 

permitted by applicable state law, divides 

Trust into two separate trusts, Trust 1 and 

Trust 2. Trust 1 provides that trust income 

is to be paid to A for life and, on A’s death, 

the remainder is to be distributed to W (or 

pursuant to W’s testamentary general power 

of appointment). Trust 2 provides that trust 

income is to be paid to B for life and, on B’s 

death, the remainder is to be distributed to 

X (or pursuant to X’s testamentary general 

power of appointment). Because Trust 1 and 

Trust 2 do not provide A and B with the 

contingent survivor income interests that 

were provided to A and B under the terms 

of Trust, Trust 1 and Trust 2 do not provide 

for the same succession of interests in the 

aggregate as provided by Trust. Therefore, the 

severance does not satisfy the requirements 

of this section and is not a qualified 

severance. Provided that Trust 1 and Trust 2 

are recognized as separate trusts under 

applicable state law, Trust 1 and Trust 2 will 

be recognized as separate trusts for GST tax 

purposes pursuant to paragraph (h) of this 

section, prospectively from the date of the 

severance. However, Trust 1 and Trust 2 each 

have an inclusion ratio of .30 immediately 

after the severance, the same as the inclusion 

ratio of Trust prior to severance. 

Example 13. Qualified severance following 

a non-qualified severance. Assume the same 

facts as in Example 12, except that, as of 

November 4, 2010, the trustee of Trust 1 

severs Trust 1 into two trusts, Trust 3 and 

Trust 4, in accordance with applicable local 

law. The instrument severing Trust 1 

provides that both resulting trusts have 

provisions identical to Trust 1. The terms of 

the instrument severing Trust 1 further 

provide that Trust 3 is to be funded on a pro 

rata basis with assets having a fair market 

value as of the date of severance equal to 

70% of the value of Trust 1’s assets on that 

date, and Trust 4 is to be funded with assets 

having a fair market value as of the date of 

severance equal to 30% of the value of Trust 

1’s assets on that date. The severance 

constitutes a qualified severance, provided 

that all other requirements of section 

2642(a)(3) and this section are satisfied. Trust 

3 will have an inclusion ratio of zero and 

Trust 4 will have an inclusion ratio of one. 

(k) * * * 

(1) In general. Except as otherwise 

provided in this paragraph (k), this 

section applies to severances occurring 

on or after August 2, 2007. Paragraph 

(d)(7)(iii), paragraph (h), and Examples 

9, 12 and 13 of paragraph (j) of this 

section apply to severances occurring on 

or after September 2, 2008. 

■ Par. 4. Section 26.2654–1 is amended 

as follows: 

■ 1. Paragraph (a)(1)(i) is revised. 

■ 2. Paragraph (a)(1)(iii) is added. 

■ 3. In paragraph (a)(5), Example 8 is 

revised. 

■ 4. Paragraph (d) is added. 

The additions and revisions read as 

follows: 

§ 26.2654–1 Certain trusts treated as 

separate trusts. 

(a) * * * (1) * * * (i) * * * If a 

single trust consists solely of 

substantially separate and independent 

shares for different beneficiaries, the 

share attributable to each beneficiary (or 

group of beneficiaries) is treated as a 

separate trust for purposes of Chapter 

13. The phrase ‘‘substantially separate 

and independent shares’’ generally has 

the same meaning as provided in 

§ 1.663(c)–3. However, except as 

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

section, a portion of a trust is not a 

separate share unless such share exists 

from and at all times after the creation 

of the trust. For purposes of this 

paragraph (a)(1), a trust is treated as 

created at the date of death of the 

grantor if the trust is includible in its 

entirety in the grantor’s gross estate for 

Federal estate tax purposes. Further, 

except with respect to shares or trusts 

that are treated as separate trusts under 

local law, treatment of a single trust as 

separate trusts under this paragraph 

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

portions as separate trusts for purposes 

of filing returns and payment of tax or 

for purposes of computing any other tax 

imposed under the Internal Revenue 

Code. Also, additions to, and 

distributions from, such trusts are 

allocated pro rata among the separate 

trusts, unless the governing instrument 

expressly provides otherwise. See 

§ 26.2642–6 and paragraph (b) of this 

section regarding the treatment, for 

purposes of Chapter 13, of separate 

trusts resulting from the discretionary 

severance of a single trust. 

* * * * * 

(iii) Mandatory severances. For 

purposes of this section, if the governing 

instrument of a trust requires the 

division or severance of a single trust 

into separate trusts upon the future 

occurrence of a particular event not 

within the discretion of the trustee or 

any other person, and if the trusts 

resulting from such a division or 

severance are recognized as separate 

trusts under applicable state law, then 

each resulting trust is treated as a 

separate trust for purposes of Chapter 

13. For this purpose, the rules of 

paragraph (b)(1)(ii)(C) of this section 

apply with respect to the severance and 

funding of the trusts. Similarly, if the 

governing instrument requires the 

division of a single trust into separate 

shares under the circumstances 

described in this paragraph, each such 

share is treated as a separate trust for 

purposes of Chapter 13. The postseverance treatment of the resulting 

shares or trusts as separate trusts for 


yshivers on PROD1PC62 with RULES
Federal Register / Vol. 73, No. 148 / Thursday, July 31, 2008 / Rules and Regulations 44653 

GST tax purposes generally permits the 

allocation of GST tax exemption, the 

making of various elections permitted 

for GST tax purposes, and the 

occurrence of a taxable distribution or 

termination with regard to a particular 

resulting share or trust, with no GST tax 

impact on any other trust or share 

resulting from that severance. The 

treatment of a single trust as separate 

trusts under this paragraph (a)(1), 

however, does not permit treatment of 

those portions as separate trusts for 

purposes of filing returns and payment 

of tax or for purposes of computing any 

other tax imposed under the Internal 

Revenue Code, if those portions are not 

treated as separate trusts under local 

law. Also, additions to, and 

distributions from, such trusts are 

allocated pro rata among the separate 

trusts, unless the governing instrument 

expressly provides otherwise. Each 

separate share and each trust resulting 

from a mandatory division or severance 

described in this paragraph will have 

the same inclusion ratio immediately 

after the severance as that of the original 

trust immediately before the division or 

severance. 

* * * * * 

(5) * * * 

Example 8. Subsequent mandatory 

division into separate trusts. T creates an 

irrevocable trust that provides the trustee 

with the discretionary power to distribute 

income or corpus to T’s children and 

grandchildren. The trust provides that, when 

T’s youngest child reaches age 21, the trust 

will be divided into separate shares, one 

share for each child of T. The income from 

a respective child’s share will be paid to the 

child during the child’s life, with the 

remainder passing on the child’s death to 

such child’s children (grandchildren of T). 

The separate shares that come into existence 

when the youngest child reaches age 21 will 

be recognized as of that date as separate 

trusts for purposes of Chapter 13. The 

inclusion ratio of the separate trusts will be 

identical to the inclusion ratio of the trust 

before the severance. Any allocation of GST 

tax exemption to the trust after T’s youngest 

child reaches age 21 may be made to any one 

or more of the separate shares. The result 

would be the same if the trust instrument 

provided that the trust was to be divided into 

separate trusts when T’s youngest child 

reached age 21, provided that the severance 

and funding of the separate trusts meets the 

requirements of this section. 

* * * * * 

(d) Effective date. Paragraph (a)(1)(i), 

paragraph (a)(1)(iii), and Example 8 of 

paragraph (a)(5) apply to severances 

occurring on or after September 2, 2008. 

Sherri L. Brown, 

(Acting) Deputy Commissioner for Services 

and Enforcement. 

Approved: July 20, 2008. 

Eric Solomon, 

Assistant Secretary of the Treasury, (Tax 

Policy). 

[FR Doc. E8–17503 Filed 7–30–08; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF HOMELAND 

SECURITY 

Coast Guard 

33 CFR Part 105 

[Docket Nos. TSA–2006–24191; USCG–

2006–24196] 

Transportation Worker Identification 

Credential (TWIC) Implementation in 

the Maritime Sector; Hazardous 

Materials Endorsement for a 

Commercial Driver’s License 

AGENCY: United States Coast Guard; 

DHS. 

ACTION: Notice of compliance date, 

Captain of the Port Zones Charleston, 

Long Island Sound, Jacksonville, and 

Savannah. 

SUMMARY: This document informs 

owners and operators of facilities 

located within Captain of the Port Zones 

Charleston, Long Island Sound, 

Jacksonville, and Savannah that they 

must implement access control 

procedures utilizing TWIC no later than 

December 1, 2008. 

DATES: The compliance date for the 

TWIC regulations found in 33 CFR part 

105 for Captain of the Port Zones 

Charleston, Long Island Sound, 

Jacksonville, and Savannah is December 

1, 2008. 

ADDRESSES: Comments and material 

received from the public, as well as 

documents mentioned in this document 

as being available in the docket, are part 

of dockets TSA–2006–24191 and 

USCG–2006–24196, and are available 

for inspection or copying at the Docket 

Management Facility, U.S. Department 

of Transportation, West Building 

Ground Floor, Room W12–140, 1200 

New Jersey Avenue, SE., Washington, 

DC 20590, between 9 a.m. and 5 p.m., 

Monday through Friday, except Federal 

holidays. You may also find this docket 

on the Internet at http:// 

www.regulations.gov. 

FOR FURTHER INFORMATION CONTACT: If 

you have questions on this Notice, call 

LCDR Jonathan Maiorine, telephone 1–

877–687–2243. If you have questions on 

viewing the docket, call Renee V. 

Wright, Program Manager, Docket 

Operations, telephone 202–493–0402. 

SUPPLEMENTARY INFORMATION: 

I. Regulatory History 

On May 22, 2006, the Department of 

Homeland Security (DHS) through the 

United States Coast Guard (Coast Guard) 

and the Transportation Security 

Administration (TSA) published a joint 

notice of proposed rulemaking entitled 

‘‘Transportation Worker Identification 

Credential (TWIC) Implementation in 

the Maritime Sector; Hazardous 

Materials Endorsement for a 

Commercial Driver’s License’’ in the 

Federal Register (71 FR 29396). This 

was followed by a 45-day comment 

period and four public meetings. The 

Coast Guard and TSA issued a joint 

final rule, under the same title, on 

January 25, 2007 (72 FR 3492) 

(hereinafter referred to as the original 

TWIC final rule). The preamble to that 

final rule contains a discussion of all the 

comments received on the NPRM, as 

well as a discussion of the provisions 

found in the original TWIC final rule, 

which became effective on March 26, 

2007. 

On May 7, 2008, the Coast Guard and 

TSA issued a final rule to realign the 

compliance date for implementation of 

the Transportation Worker 

Identification Credential. 73 FR 25562. 

The date by which mariners need to 

obtain a TWIC, and by which owners 

and operators of vessels, facilities, and 

outer continental shelf facilities, who 

have not otherwise been required to 

implement access control procedures 

utilizing TWIC, must implement those 

procedures, is now April 15, 2009 

instead of September 25, 2008. Owners 

and operators of facilities that must 

comply with 33 CFR part 105 will still 

be subject to earlier, rolling compliance 

dates, as set forth in 33 CFR 105.115(e). 

The Coast Guard will continue to 

announce rolling compliance dates, as 

provided in 33 CFR 105.115(e), at least 

90 days in advance via notices 

published in the Federal Register. The 

final compliance date for all COTP 

Zones will not be later than April 15, 

2009. 

II. Notice of Facility Compliance Date—

COTP Zones Charleston, Long Island 

Sound, Jacksonville, and Savannah 

Title 33 CFR 105.115(e) currently 

states that ‘‘[f]acility owners and 

operators must be operating in 

accordance with the TWIC provisions in 

this part by the date set by the Coast 

Guard in a Notice to be published in the 


yshivers on PROD1PC62 with RULES