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Regulation and Compliance > Federal Regulation

IRS Proposes Generation-Skipping Trust Regulation

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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.

The new provision gives trustees more time to sever trusts and provide a uniform system for severance, Samuels writes.

The proposed regulation governs how planners must divide the trust assets when they sever a trust and the income tax consequences of severance.

The proposed regulation also emphasizes that the new trusts must provide for the same succession of interests as the old trusts, and it requires that parties who sever a GST trust must report on that activity by filing Form 706-GS(T).

Samuels notes that planners who want to use Section 2642(a)(3) to split GST trusts along family lines might have to use a series of severances to accomplish that goal.

Comments on the proposed regulation are due Nov. 22.

The IRS has posted the proposed regulation the Web at //