‘‘(II) any or all transfers made by
such individual to a particular trust,
and
‘‘(ii) may elect to treat any trust as a
GST trust for purposes of this subsection
with respect to any or all transfers made by
such individual to such trust.
‘‘(B) ELECTIONS.—
‘‘(i) ELECTIONS WITH RESPECT TO IN-
DIRECT SKIPS.—An election under subpara-
graph (A)(i)(I) shall be deemed to be timely
if filed on a timely filed gift tax return for
the calendar year in which the transfer was
made or deemed to have been made pursu-
ant to paragraph (4) or on such later date
or dates as may be prescribed by the Sec-
retary.
‘‘(ii) OTHER ELECTIONS.—An election
under clause (i)(II) or (ii) of subparagraph
(A) may be made on a timely filed gift tax
return for the calendar year for which the
election is to become effective.
‘‘(d) RETROACTIVE ALLOCATIONS.—
‘‘(1) IN GENERAL.—If—
‘‘(A) a non-skip person has an interest or a
future interest in a trust to which any transfer
has been made,
‘‘(B) such person—
‘‘(i) is a lineal descendant of a grand-
parent of the transferor or of a grandparent
of the transferor’s spouse or former spouse,
and
‘‘(ii) is assigned to a generation below
the generation assignment of the transferor,
and
‘‘(C) such person predeceases the transferor,
then the transferor may make an allocation of any of
such transferor’s unused GST exemption to any pre-
vious transfer or transfers to the trust on a chrono-
logical basis.
‘‘(2) SPECIAL RULES.—If the allocation under
paragraph (1) by the transferor is made on a gift tax
return filed on or before the date prescribed by section
6075(b) for gifts made within the calendar year with-
in which the non-skip person’s death occurred—
‘‘(A) the value of such transfer or transfers
for purposes of section 2642(a) shall be deter-
mined as if such allocation had been made on a
timely filed gift tax return for each calendar
year within which each transfer was made,
‘‘(B) such allocation shall be effective imme-
diately before such death, and
‘‘(C) the amount of the transferor’s unused
GST exemption available to be allocated shall be
determined immediately before such death.
‘‘(3) FUTURE INTEREST.—For purposes of this
subsection, a person has a future interest in a trust
if the trust may permit income or corpus to be paid
to such person on a date or dates in the future.’’.
(b) CONFORMING AMENDMENT.—Paragraph (2) of sec-
tion 2632(b) is amended by striking ‘‘with respect to a prior
direct skip’’ and inserting ‘‘or subsection (c)(1)’’.
(c) EFFECTIVE DATES.—
(1) DEEMED ALLOCATION.—Section 2632(c) of
the Internal Revenue Code of 1986 (as added by sub-
section (a)), and the amendment made by subsection
(b), shall apply to transfers subject to chapter 11 or
12 made after December 31, 2000, and to estate tax
inclusion periods ending after December 31, 2000.
(2) 
RETROACTIVE
ALLOCATIONS.—Section
2632(d) of the Internal Revenue Code of 1986 (as
added by subsection (a)) shall apply to deaths of non-
skip persons occurring after December 31, 2000.
SEC. 602. SEVERING OF TRUSTS.
(a) IN GENERAL.—Subsection (a) of section 2642 (re-
lating to inclusion ratio) is amended by adding at the end
the following new paragraph:
‘‘(3) SEVERING OF TRUSTS.—
‘‘(A) IN GENERAL.—If a trust is severed in
a qualified severance, the trusts resulting from
such severance shall be treated as separate trusts
thereafter for purposes of this chapter.
‘‘(B) QUALIFIED
SEVERANCE.—For pur-
poses of subparagraph (A)—
‘‘(i) IN GENERAL.—The term ‘qualified
severance’ means the division of a single
trust and the creation (by any means avail-
able under the governing instrument or
under local law) of two or more trusts if—
‘‘(I) the single trust was divided
on a fractional basis, and
‘‘(II) the terms of the new trusts,
in the aggregate, provide for the same
succession of interests of beneficiaries
as are provided in the original trust.
‘‘(ii) TRUSTS WITH INCLUSION RATIO
GREATER THAN ZERO.—If a trust has an
inclusion ratio of greater than zero and less
than 1, a severance is a qualified severance
only if the single trust is divided into two
trusts, one of which receives a fractional
share of the total value of all trust assets
equal to the applicable fraction of the single
trust immediately before the severance. In
such case, the trust receiving such fractional
share shall have an inclusion ratio of zero
and the other trust shall have an inclusion
ratio of 1.
‘‘(iii) 
REGULATIONS.—The 
term
‘qualified severance’ includes any other sev-
erance permitted under regulations pre-
scribed by the Secretary.
‘‘(C) 
TIMING
AND
MANNER
OF
SEVERANCES.—A severance pursuant to this
paragraph may be made at any time. The Sec-
retary shall prescribe by forms or regulations the
manner in which the qualified severance shall be
reported to the Secretary.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to severances after December 31, 2000.
SEC. 603. MODIFICATION OF CERTAIN VALUATION RULES.
(a) GIFTS FOR WHICH GIFT TAX RETURN FILED OR
DEEMED ALLOCATION MADE.—Paragraph (1) of section