Trust Updates Archive
More Options When Splitting Trusts
(August 31, 2004, CHICAGO)--Liberalized regulations providing more options for severing trusts and creating a uniform system for severance are being proposed by the IRS.
The proposed rule clarifies section 2642(a)(3) of the Internal Revenue Code, which provides that, if a trust is divided into two or more trusts in a "qualified severance," the resulting trusts will be recognized as separate trusts for generation-skipping transfer (GST) tax purposes.
The GST is imposed at the highest estate tax rate multiplied by an "inclusion ratio." The "inclusion ratio" is obtained by subtracting from one a fraction calculated by dividing the amount of the estate exemption allocated to the trust over the value of property transferred to the trust. Like the federal estate tax, the GST is scheduled to be repealed in the year 2010.
A qualified severance is defined as the creation of two or more trusts from a single trust divided on a fractional basis. The terms of the new trusts, in the aggregate, must provide for the same succession of interests of beneficiaries as in the original trust.
The proposed regulations do not require pro rated portions for the new trusts, avoiding the necessity of dividing each and every asset on a fractional basis.
The changes also clarify that severances along family lines can be accomplished by first dividing the trust based on the inclusion ratio, then dividing each resulting trust along family lines.
The proposed regulations further clarify that a modification to a trust that was irrevocable before September 26, 1985, will not cause the trust to be subject to the provisions of chapter 13 if the modification does not (1) shift a beneficial interest in the trust to any beneficiary who occupies a lower generation than the person who held the beneficial interest prior to the modification or (2) extend the time for vesting of any beneficial interest in the trust beyond the period provided in the original trust.
Notice to the IRS of a qualified severance should be filed using Form 706-GS(T), providing the inclusion ratio of the trust that was severed and the inclusion ratios of the new trusts resulting from the severance.
The rule is effective after the IRS adopts it in its final form. The rule will be retroactive to December 31, 2000. For severances occurring after December 31, 2000, and before publication of final rule, taxpayers may rely on “any reasonable interpretation” of the proposed regulations provided reasonable notice concerning the severance and identification of the trusts has been given to the IRS, according to the agency.
Comments on the proposed regulations need to be received by November 22, 2004. They can be sent via the IRS website: www.irs.gov/regs, reference IRS - REG-145987-03. To contact the IRS directly, call Mayer R. Samuels at 202-622-3090. ((See Federal Register, August 24, 2004, vol. 69, no. 163, pp. 51967-73.)
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