IRS Proposes Generation-Skipping Trust Regulation

The Internal Revenue Service has proposed a regulation that deals with qualified severance of a trust for generation-skipping transfer tax purposes.[@@]

The proposed regulation would provide guidance for financial planning experts who want to know how to apply a section of the Economic Growth and Tax Relief Reconciliation Act of 2001 that affects generation-skipping transfers.

A generation-skipping transfer trust is a trust with beneficiaries who are at least 2 generations younger than the grantor.

Wealthy families often use generation-skipping trusts to leave assets to grandchildren and great-grandchildren without suffering huge tax burdens. Grantors who form generation-skipping trusts can take advantage of a $1.5 million GST tax exemption.

When Congress enacted EGTRRA in 2001, it included a provision that added Section 2642(a)(3) to the Internal Revenue Code. Section 2642(a)(3) provides that, “if a trust is divided into 2 or more trusts in a qualified severance, the resulting trusts will be recognized as separate trusts for GST tax purposes,” Mayer Samuels, an IRS official, writes in a discussion of the proposed regulations that appears today in the Federal Register.

Section 2642(a)(3) replaces an older, more limited trust severance provision.