Internal Revenue Code:Sec. 2642. Inclusion ratio
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Location in Internal Revenue Code
TITLE 26 - INTERNAL REVENUE CODE
Subtitle B - Estate and Gift Taxes
CHAPTER 13 - TAX ON GENERATION-SKIPPING TRANSFERS
Subchapter E - Applicable Rate; Inclusion Ratio
Statute
Sec. 2642. Inclusion ratio
(a) Inclusion ratio defined
For purposes of this chapter -
(1) In general
Except as otherwise provided in this section, the inclusion
ratio with respect to any property transferred in a
generation-skipping transfer shall be the excess (if any) of 1
over -
(A) except as provided in subparagraph (B), the applicable
fraction determined for the trust from which such transfer is
made, or
(B) in the case of a direct skip, the applicable fraction
determined for such skip.
(2) Applicable fraction
For purposes of paragraph (1), the applicable fraction is a
fraction -
(A) the numerator of which is the amount of the GST exemption
allocated to the trust (or in the case of a direct skip,
allocated to the property transferred in such skip), and
(B) the denominator of which is -
(i) the value of the property transferred to the trust (or
involved in the direct skip), reduced by
(ii) the sum of -
(I) any Federal estate tax or State death tax actually
recovered from the trust attributable to such property, and
(II) any charitable deduction allowed under section 2055
or 2522 with respect to such property.
(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 purposes of subparagraph (A) -
(i) In general
The term ''qualified severance'' means the division of a
single trust and the creation (by any means available 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
severance permitted under regulations prescribed by the
Secretary.
(C) Timing and manner of severances
A severance pursuant to this paragraph may be made at any
time. The Secretary shall prescribe by forms or regulations
the manner in which the qualified severance shall be reported
to the Secretary.
(b) Valuation rules, etc.
Except as provided in subsection (f) -
(1) Gifts for which gift tax return filed or deemed allocation
made
If the allocation of the GST exemption to any transfers of
property is made on a gift tax return filed on or before the date
prescribed by section 6075(b) for such transfer or is deemed to
be made under section 2632(b)(1) or (c)(1) -
(A) the value of such property for purposes of subsection (a)
shall be its value as finally determined for purposes of
chapter 12 (within the meaning of section 2001(f)(2)), or, in
the case of an allocation deemed to have been made at the close
of an estate tax inclusion period, its value at the time of the
close of the estate tax inclusion period, and
(B) such allocation shall be effective on and after the date
of such transfer, or, in the case of an allocation deemed to
have been made at the close of an estate tax inclusion period,
on and after the close of such estate tax inclusion period.
(2) Transfers and allocations at or after death
(A) Transfers at death
If property is transferred as a result of the death of the
transferor, the value of such property for purposes of
subsection (a) shall be its value as finally determined for
purposes of chapter 11; except that, if the requirements
prescribed by the Secretary respecting allocation of post-death
changes in value are not met, the value of such property shall
be determined as of the time of the distribution concerned.
(B) Allocations to property transferred at death of transferor
Any allocation to property transferred as a result of the
death of the transferor shall be effective on and after the
date of the death of the transferor.
(3) Allocations to inter vivos transfers not made on timely filed
gift tax return
If any allocation of the GST exemption to any property not
transferred as a result of the death of the transferor is not
made on a gift tax return filed on or before the date prescribed
by section 6075(b) and is not deemed to be made under section
2632(b)(1) -
(A) the value of such property for purposes of subsection (a)
shall be determined as of the time such allocation is filed
with the Secretary, and
(B) such allocation shall be effective on and after the date
on which such allocation is filed with the Secretary.
(4) QTIP trusts
If the value of property is included in the estate of a spouse
by virtue of section 2044, and if such spouse is treated as the
transferor of such property under section 2652(a), the value of
such property for purposes of subsection (a) shall be its value
for purposes of chapter 11 in the estate of such spouse.
(c) Treatment of certain direct skips which are nontaxable gifts
(1) In general
In the case of a direct skip which is a nontaxable gift, the
inclusion ratio shall be zero.
(2) Exception for certain transfers in trust
Paragraph (1) shall not apply to any transfer to a trust for
the benefit of an individual unless -
(A) during the life of such individual, no portion of the
corpus or income of the trust may be distributed to (or for the
benefit of) any person other than such individual, and
(B) if the trust does not terminate before the individual
dies, the assets of such trust will be includible in the gross
estate of such individual.
Rules similar to the rules of section 2652(c)(3) shall apply for
purposes of subparagraph (A).
(3) Nontaxable gift
For purposes of this subsection, the term ''nontaxable gift''
means any transfer of property to the extent such transfer is not
treated as a taxable gift by reason of -
(A) section 2503(b) (taking into account the application of
section 2513), or
(B) section 2503(e).
(d) Special rules where more than 1 transfer made to trust
(1) In general
If a transfer of property is made to a trust in existence
before such transfer, the applicable fraction for such trust
shall be recomputed as of the time of such transfer in the manner
provided in paragraph (2).
(2) Applicable fraction
In the case of any such transfer, the recomputed applicable
fraction is a fraction -
(A) the numerator of which is the sum of -
(i) the amount of the GST exemption allocated to property
involved in such transfer, plus
(ii) the nontax portion of such trust immediately before
such transfer, and
(B) the denominator of which is the sum of -
(i) the value of the property involved in such transfer
reduced by the sum of -
(I) any Federal estate tax or State death tax actually
recovered from the trust attributable to such property, and
(II) any charitable deduction allowed under section 2055
or 2522 with respect to such property, and
(ii) the value of all of the property in the trust
(immediately before such transfer).
(3) Nontax portion
For purposes of paragraph (2), the term ''nontax portion''
means the product of -
(A) the value of all of the property in the trust, and
(B) the applicable fraction in effect for such trust.
(4) Similar recomputation in case of certain late allocations
If -
(A) any allocation of the GST exemption to property
transferred to a trust is not made on a timely filed gift tax
return required by section 6019, and
(B) there was a previous allocation with respect to property
transferred to such trust,
the applicable fraction for such trust shall be recomputed as of
the time of such allocation under rules similar to the rules of
paragraph (2).
(e) Special rules for charitable lead annuity trusts
(1) In general
For purposes of determining the inclusion ratio for any
charitable lead annuity trust, the applicable fraction shall be a
fraction -
(A) the numerator of which is the adjusted GST exemption, and
(B) the denominator of which is the value of all of the
property in such trust immediately after the termination of the
charitable lead annuity.
(2) Adjusted GST exemption
For purposes of paragraph (1), the adjusted GST exemption is an
amount equal to the GST exemption allocated to the trust
increased by interest determined -
(A) at the interest rate used in determining the amount of
the deduction under section 2055 or 2522 (as the case may be)
for the charitable lead annuity, and
(B) for the actual period of the charitable lead annuity.
(3) Definitions
For purposes of this subsection -
(A) Charitable lead annuity trust
The term ''charitable lead annuity trust'' means any trust in
which there is a charitable lead annuity.
(B) Charitable lead annuity
The term ''charitable lead annuity'' means any interest in
the form of a guaranteed annuity with respect to which a
deduction was allowed under section 2055 or 2522 (as the case
may be).
(4) Coordination with subsection (d)
Under regulations, appropriate adjustments shall be made in the
application of subsection (d) to take into account the provisions
of this subsection.
(f) Special rules for certain inter vivos transfers
Except as provided in regulations -
(1) In general
For purposes of determining the inclusion ratio, if -
(A) an individual makes an inter vivos transfer of property,
and
(B) the value of such property would be includible in the
gross estate of such individual under chapter 11 if such
individual died immediately after making such transfer (other
than by reason of section 2035),
any allocation of GST exemption to such property shall not be
made before the close of the estate tax inclusion period (and the
value of such property shall be determined under paragraph (2)).
If such transfer is a direct skip, such skip shall be treated as
occurring as of the close of the estate tax inclusion period.
(2) Valuation
In the case of any property to which paragraph (1) applies, the
value of such property shall be -
(A) if such property is includible in the gross estate of the
transferor (other than by reason of section 2035), its value
for purposes of chapter 11, or
(B) if subparagraph (A) does not apply, its value as of the
close of the estate tax inclusion period (or, if any allocation
of GST exemption to such property is not made on a timely filed
gift tax return for the calendar year in which such period
ends, its value as of the time such allocation is filed with
the Secretary).
(3) Estate tax inclusion period
For purposes of this subsection, the term ''estate tax
inclusion period'' means any period after the transfer described
in paragraph (1) during which the value of the property involved
in such transfer would be includible in the gross estate of the
transferor under chapter 11 if he died. Such period shall in no
event extend beyond the earlier of -
(A) the date on which there is a generation-skipping transfer
with respect to such property, or
(B) the date of the death of the transferor.
(4) Treatment of spouse
Except as provided in regulations, any reference in this
subsection to an individual or transferor shall be treated as
including a reference to the spouse of such individual or
transferor.
(5) Coordination with subsection (d)
Under regulations, appropriate adjustments shall be made in the
application of subsection (d) to take into account the provisions
of this subsection.
(g) Relief provisions
(1) Relief from late elections
(A) In general
The Secretary shall by regulation prescribe such
circumstances and procedures under which extensions of time
will be granted to make -
(i) an allocation of GST exemption described in paragraph
(1) or (2) of subsection (b), and
(ii) an election under subsection (b)(3) or (c)(5) of
section 2632.
Such regulations shall include procedures for requesting
comparable relief with respect to transfers made before the
date of the enactment of this paragraph.
(B) Basis for determinations
In determining whether to grant relief under this paragraph,
the Secretary shall take into account all relevant
circumstances, including evidence of intent contained in the
trust instrument or instrument of transfer and such other
factors as the Secretary deems relevant. For purposes of
determining whether to grant relief under this paragraph, the
time for making the allocation (or election) shall be treated
as if not expressly prescribed by statute.
(2) Substantial compliance
An allocation of GST exemption under section 2632 that
demonstrates an intent to have the lowest possible inclusion
ratio with respect to a transfer or a trust shall be deemed to be
an allocation of so much of the transferor's unused GST exemption
as produces the lowest possible inclusion ratio. In determining
whether there has been substantial compliance, all relevant
circumstances shall be taken into account, including evidence of
intent contained in the trust instrument or instrument of
transfer and such other factors as the Secretary deems relevant.
Sources
(Added Pub. L. 99-514, title XIV, Sec. 1431(a), Oct. 22, 1986, 100
Stat. 2722; amended Pub. L. 100-647, title I, Sec. 1014(g)(3)(A),
(4), (17)(A), (B), (18), Nov. 10, 1988, 102 Stat. 3563, 3566, 3567;
Pub. L. 101-239, title VII, Sec. 7811(j)(4), Dec. 19, 1989, 103
Stat. 2411; Pub. L. 101-508, title XI, Sec. 11703(c)(1), (2),
11704(a)(17), (36), Nov. 5, 1990, 104 Stat. 1388-517, 1388-519;
Pub. L. 107-16, title V, Sec. 562(a), 563(a), (b), 564(a), June 7,
2001, 115 Stat. 89-91.)
Amendment of Section
AMENDMENT OF SECTION
For termination of amendment by section 901 of Pub. L. 107-16,
see Effective and Termination Dates of 2001 Amendment note below.
Miscellaneous
AMENDMENTS
2001 - Subsec. (a)(3). Pub. L. 107-16, Sec. 562(a), 901,
temporarily added par. (3). See Effective and Termination Dates of
2001 Amendment note below.
Subsec. (b)(1). Pub. L. 107-16, Sec. 563(a), 901, temporarily
reenacted heading without change and amended text of par. (1)
generally. Prior to amendment, text read as follows: ''If the
allocation of the GST exemption to any property is made on a gift
tax return filed on or before the date prescribed by section
6075(b) or is deemed to be made under section 2632(b)(1) -
''(A) the value of such property for purposes of subsection (a)
shall be its value for purposes of chapter 12, and
''(B) such allocation shall be effective on and after the date
of such transfer.''
See Effective and Termination Dates of 2001 Amendment note below.
Subsec. (b)(2)(A). Pub. L. 107-16, Sec. 563(b), 901, temporarily
reenacted heading without change and amended text of subpar. (A)
generally. Prior to amendment, text read as follows: ''If property
is transferred as a result of the death of the transferor, the
value of such property for purposes of subsection (a) shall be its
value for purposes of chapter 11; except that, if the requirements
prescribed by the Secretary respecting allocation of post-death
changes in value are not met, the value of such property shall be
determined as of the time of the distribution concerned.'' See
Effective and Termination Dates of 2001 Amendment note below.
Subsec. (g). Pub. L. 107-16, Sec. 564(a), 901, temporarily added
subsec. (g). See Effective and Termination Dates of 2001 Amendment
note below.
1990 - Subsec. (b)(3). Pub. L. 101-508, Sec. 11704(a)(36),
amended Pub. L. 100-647, Sec. 1014(g)(4)(F)(ii). See 1988 Amendment
note below.
Subsec. (c)(2). Pub. L. 101-508, Sec. 11703(c)(2), inserted at
end: ''Rules similar to the rules of section 2652(c)(3) shall apply
for purposes of subparagraph (A).''
Subsec. (c)(2)(B). Pub. L. 101-508, Sec. 11703(c)(1), substituted
''the trust does not terminate before the individual dies'' for
''such individual dies before the trust is terminated''.
Subsec. (d)(2)(B)(i)(I). Pub. L. 101-508, Sec. 11704(a)(17),
substituted ''State'' for ''state''.
1989 - Subsec. (b)(1), (3). Pub. L. 101-239 substituted ''a gift
tax return filed on or before the date prescribed by section
6075(b)'' for ''a timely filed gift tax return required by section
6019'' in introductory provisions.
1988 - Subsec. (a)(2). Pub. L. 100-647, Sec. 1014(g)(4)(B),
struck out at end ''Except as provided in paragraphs (3) and (4) of
subsection (b), the value determined under subparagraph (B)(i)
shall be of the property as of the time of the transfer to the
trust (or the direct skip).''
Subsec. (b). Pub. L. 100-647, Sec. 1014(g)(4)(D), inserted
''Except as provided in subsection (f) - '' as introductory
provision.
Subsec. (b)(2)(A). Pub. L. 100-647, Sec. 1014(g)(4)(C), inserted
before period at end ''; except that, if the requirements
prescribed by the Secretary respecting allocation of post-death
changes in value are not met, the value of such property shall be
determined as of the time of the distribution concerned.''
Subsec. (b)(2)(B). Pub. L. 100-647, Sec. 1014(g)(4)(E),
substituted ''to property transferred at death'' for ''at or after
death'' in heading and ''to property transferred as a result of the
death of the transferor'' for ''at or after the death of the
transferor'' in text.
Subsec. (b)(3). Pub. L. 100-647, Sec. 1014(g)(4)(F)(ii), as
amended by Pub. L. 101-508, Sec. 11704(a)(36), substituted
''Allocations to inter vivos transfers'' for ''Inter vivos
allocations'' in heading.
Pub. L. 100-647, Sec. 1014(g)(4)(F)(i), substituted ''to any
property not transferred as a result of the death of the transferor
is'' for ''to any property is made during the life of the
transferor but is''.
Subsec. (c). Pub. L. 100-647, Sec. 1014(g)(17)(A), inserted
''direct skips which are'' in heading and amended text generally.
Prior to amendment, text read as follows:
''(1) Direct skips. - In the case of any direct skip which is a
nontaxable gift, the inclusion ratio shall be zero.
''(2) Treatment of nontaxable gifts made to trusts. -
''(A) In general. - Except as provided in subparagraph (B), any
nontaxable gift which is not a direct skip and which is made to a
trust shall not be taken into account under subsection (a)(2)(B).
''(B) Determination of 1st transfer to trust. - In the case of
any nontaxable gift referred to in subparagraph (A) which is the
1st transfer to the trust, the inclusion ratio for such trust
shall be zero.
''(3) Nontaxable gift. - For purposes of this section, the term
'nontaxable gift' means any transfer of property to the extent such
transfer is not treated as a taxable gift by reason of -
''(A) section 2503(b) (taking into account the application of
section 2513), or
''(B) section 2503(e).''
Subsec. (d)(1). Pub. L. 100-647, Sec. 1014(g)(17)(B), struck out
''(other than a nontaxable gift)'' after ''transfer of property''.
Subsec. (d)(2)(B)(i). Pub. L. 100-647, Sec. 1014(g)(18), amended
cl. (i) generally. Prior to amendment, cl. (i) read as follows:
''the value of the property involved in such transfer, reduced by
any charitable deduction allowed under section 2055 or 2522 with
respect to such property, and''.
Subsec. (e). Pub. L. 100-647, Sec. 1014(g)(3)(A), added subsec.
(e).
Subsec. (f). Pub. L. 100-647, Sec. 1014(g)(4)(A), added subsec.
(f).
EFFECTIVE AND TERMINATION DATES OF 2001 AMENDMENT
Pub. L. 107-16, title V, Sec. 562(b), June 7, 2001, 115 Stat. 90,
provided that: ''The amendment made by this section (amending this
section) shall apply to severances after December 31, 2000.''
Pub. L. 107-16, title V, Sec. 563(c), June 7, 2001, 115 Stat. 91,
provided that: ''The amendments made by this section (amending this
section) shall apply to transfers subject to chapter 11 or 12 of
the Internal Revenue Code of 1986 made after December 31, 2000.''
Pub. L. 107-16, title V, Sec. 564(b), June 7, 2001, 115 Stat. 91,
provided that:
''(1) Relief from late elections. - Section 2642(g)(1) of the
Internal Revenue Code of 1986 (as added by subsection (a)) shall
apply to requests pending on, or filed after, December 31, 2000.
''(2) Substantial compliance. - Section 2642(g)(2) of such Code
(as so added) shall apply to transfers subject to chapter 11 or 12
of the Internal Revenue Code of 1986 made after December 31, 2000.
No implication is intended with respect to the availability of
relief from late elections or the application of a rule of
substantial compliance on or before such date.''
Amendment by Pub. L. 107-16 inapplicable to estates of decedents
dying, gifts made, or generation skipping transfers, after Dec. 31,
2010, and the Internal Revenue Code of 1986 to be applied and
administered to such estates, gifts, and transfers as if such
amendment had never been enacted, see section 901 of Pub. L.
107-16, set out as a note under section 1 of this title.
EFFECTIVE DATE OF 1990 AMENDMENT
Section 11703(c)(4) of Pub. L. 101-508 provided that: ''The
amendments made by paragraphs (1) and (2) (amending this section)
shall apply to transfers after March 31, 1988.''
EFFECTIVE DATE OF 1989 AMENDMENT
Amendment by Pub. L. 101-239 effective, except as otherwise
provided, as if included in the provision of the Technical and
Miscellaneous Revenue Act of 1988, Pub. L. 100-647, to which such
amendment relates, see section 7817 of Pub. L. 101-239, set out as
a note under section 1 of this title.
EFFECTIVE DATE OF 1988 AMENDMENT
Section 1014(g)(3)(B) of Pub. L. 100-647 provided that: ''The
amendment made by subparagraph (A) (amending this section) shall
apply for purposes of determining the inclusion ratio with respect
to property transferred after October 13, 1987.''
Section 1014(g)(17)(C) of Pub. L. 100-647 provided that: ''The
amendments made by this paragraph (amending this section) shall
apply to transfers after March 31, 1988.''
Amendment by section 1014(g)(4), (18) of Pub. L. 100-647
effective, except as otherwise provided, as if included in the
provision of the Tax Reform Act of 1986, Pub. L. 99-514, to which
such amendment relates, see section 1019(a) of Pub. L. 100-647, set
out as a note under section 1 of this title.
EFFECTIVE DATE
Section applicable to generation-skipping transfers (within the
meaning of section 2611 of this title) made after Oct. 22, 1986,
except as otherwise provided, see section 1433 of Pub. L. 99-514,
set out as a note under section 2601 of this title.
References
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 2632, 2654 of this title.
