The Internal Revenue Service has published a final rule and a proposed rule of interest to estate planners and other advisors who deal with generation-skipping trusts.

The final rule, based on a draft published in August 2004, describes the rules that the IRS will apply when taxpayers “sever,” or divide, trusts that are designed to last for more than one generation.

The final rule, which takes effect today, implements a provision of the Economic Growth and Tax Relief Reconciliation Act of 2001. The provision permits taxpayers who divide trusts through a “qualified severance” to treat the trusts as separate trusts for generation-skipping trust tax purposes.

In many cases, using a qualified severance of a trust will help transferors get the most out of their GST tax exemptions, IRS officials write in a preamble to the new final rule, which appears today in the Federal Register.

In the proposed rule, IRS officials suggested that the EGTRRA GST provision should replace old trust severance rules.

Now, in response to comments, the IRS has decided that rather than replacing the old rules, the EGTRRA provision expands upon the old rules and gives the IRS more flexibility, officials write in the proposed GST severance rule, which also appears today in the Federal Register.

The proposed regulation deals with the rules the IRS will apply when a split of a generation-skipping trust does not count as a “qualified severance” under federal law but does create separate trusts under state law.

In that case, the “GST tax exemption allocated after the severance may be separately allocated to one or more of the resulting trusts and the trusts will otherwise be treated as separate trusts for GST tax purposes,” officials write in the preamble to the proposed GST severance regulation.

A copy of the new GST severance rule is on the Web ‘>Document Link

A copy of the proposed rule dealing with conflicts between state and federal GST severance rules is on the Web