Predeceased Parent Rule, 41140-41144 [05-13799]
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Federal Register / Vol. 70, No. 136 / Monday, July 18, 2005 / Rules and Regulations
PART 529—CERTAIN OTHER DOSAGE
FORM NEW ANIMAL DRUGS
3. The authority citation for 21 CFR
part 529 continues to read as follows:
I
consideration of all the comments, the
proposed regulations are adopted as
amended by this Treasury decision. The
revisions are discussed below.
Summary of Comments
The proposed regulations provided
that, for purposes of determining
§ 529.1660 [Amended]
whether the predeceased parent rule
I 4. Section 529.1660 is amended in
applies, an individual transferee’s
paragraph (b)(2) by removing ‘‘No.
059130’’ and by adding in its place ‘‘Nos. interest in property is established or
derived at the time the transferor who
000069 and 059130’’.
transferred the property is subject to
Dated: July 1, 2005.
either the gift or estate tax on the
Catherine P. Beck,
property. If the transferor will be subject
Acting Director, Center for Veterinary
to a transfer tax imposed on the
Medicine.
property transferred on more than one
[FR Doc. 05–14017 Filed 7–15–05; 8:45 am]
occasion, then the relevant time for
determining whether the predeceased
BILLING CODE 4160–01–S
parent rule applies is the earliest time
at which the transferor is subject to the
gift or estate tax. In the case of a trust
DEPARTMENT OF THE TREASURY
for which an election under section
2056(b)(7) (QTIP election) has been
Internal Revenue Service
made, the proposed regulations
provided that the interest of the
26 CFR Part 26
remainder beneficiary is considered as
[TD 9214]
established or derived when the QTIP
RIN 1545–BC60
trust was established. However, the
proposed regulations also included an
Predeceased Parent Rule
exception to this general rule by
providing that, to the extent of the QTIP
AGENCY: Internal Revenue Service (IRS),
(but not a reverse QTIP) election, the
Treasury.
remainder beneficiary’s interest is
ACTION: Final regulations.
deemed to have been established or
derived on the death of the transferor’s
SUMMARY: This document contains final
spouse (the income beneficiary), rather
regulations relating to the predeceased
than on the transferor’s earlier death.
parent rule, which provides an
One commentator indicated that this
exception to the general rules of section
exception is unnecessary. The
2651 of the Internal Revenue Code
commentator believes that the proposed
(Code) for determining the generation
regulations misinterpreted the statute
assignment of a transferee of property
because a remainder beneficiary’s
for generation-skipping transfer (GST)
interest in a trust that is subject to a
tax purposes. These regulations also
QTIP (but not a reverse QTIP) election
provide rules regarding a transferee
should always be deemed to have been
assigned to more than one generation.
established, not at the time of the trust’s
The regulations reflect changes to the
creation, but rather at the time when the
law made by the Taxpayer Relief Act of
income-beneficiary spouse is first
1997 and generally apply to individuals,
subject to gift or estate tax on the trust
trusts, and estates.
property. This position applies the
DATES: Effective Date: These regulations
definition of ‘‘transferor’’ in section
are effective July 18, 2005.
2652 in the context of the reference to
FOR FURTHER INFORMATION CONTACT: Lian ‘‘established and derived’’ in section
A. Mito at (202) 622–7830 (not a toll2651(e), and is based on the conclusion
free number).
that the tax in this situation is not
imposed on the same transferor on more
SUPPLEMENTARY INFORMATION:
than one occasion. Thus, because the
Background
donee or surviving spouse becomes the
transferor of a trust that is subject to a
On September 3, 2004, a notice of
proposed rulemaking (REG–145988–03) QTIP (but not reverse QTIP) election,
the remainder beneficiary’s interest in
relating to the predeceased parent rule
such a trust is established upon that
was published in the Federal Register
spouse’s gift of an interest in the trust
(69 FR 53862). The public hearing
or that spouse’s death, in each case the
scheduled for December 14, 2004, was
time at which gift or estate tax on the
cancelled because no requests to speak
trust is first imposed on that spouse.
were received. Written comments
Viewed from this perspective, this
responding to the notice of proposed
provision of the proposed regulations is
rulemaking were received. After
Authority: 21 U.S.C. 360b.
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not an exception. The Treasury
Department and the IRS agree, and the
final regulations adopt the suggested
change.
Under the proposed regulations, the
predeceased parent rule does not apply
to transfers to collateral heirs if, at the
time of the transfer, ‘‘the transferor (or
the transferor’s spouse or former spouse)
has any living lineal descendant.’’ Thus,
under the proposed regulations, if, at
the time of the transfer, the transferor
has no living lineal descendants but the
transferor’s spouse or former spouse
does, the predeceased parent rule will
not apply to any transfer by the
transferor to a collateral heir. A number
of commentators pointed out that the
parenthetical language is inconsistent
with the purpose and language of the
statute, and will inappropriately narrow
the application of the predeceased
parent rule with respect to collateral
heirs. The Treasury Department and the
IRS agree, and the parenthetical
language is removed in the final
regulations. Accordingly, the final
regulations require that, for the
predeceased parent rule to apply to
transfers to collateral heirs, only the
transferor must have no living lineal
descendants at the time of the transfer.
The proposed regulations provided an
exception to the general rule that
assigns an individual to the youngest of
the generations to which that individual
may be assigned. Under the exception,
an adopted individual will be treated as
a member of the generation that is one
generation below the adoptive parent for
purposes of determining whether a
transfer to the adopted individual from
the adoptive parent (or the spouse or
former spouse of the adoptive parent, or
a lineal descendant of a grandparent of
the adoptive parent) is subject to the
GST tax. The proposed regulations
defined an ‘‘adopted individual’’ as an
individual who is: (1) A descendant of
a parent of the adoptive parent (or the
spouse or former spouse of the adoptive
parent); and (2) under the age of 18 at
the time of the adoption.
Two commentators expressed concern
that this objective test (specifically, the
age at the time of the adoption) provides
a strong inducement to engage in a taxmotivated adoption, particularly in the
case of older minors, because of the
amount of GST tax that thereby may be
avoided. One commentator suggested
lowering the limit on the age of the
individual at the time of the adoption
for purposes of the test. The other
commentator recommended adding a
third element to the definition of
adopted individual, namely, that the
individual was not adopted primarily
for tax-avoidance purposes.
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Federal Register / Vol. 70, No. 136 / Monday, July 18, 2005 / Rules and Regulations
The Treasury Department and the IRS
continue to believe that certain adopted
minors should be treated as a member
of the generation that is one generation
below the adoptive parent, but only if
the adoption is not primarily for the
purpose of avoiding GST tax. Therefore,
under the final regulations, the adopted
individual will be treated as a member
of the generation that is one generation
below the adoptive parent for purposes
of determining whether transfers from
certain individuals to the adopted
individual are subject to GST tax if the
following requirements are satisfied: (1)
The individual is legally adopted by the
adoptive parent; (2) the individual is a
descendant of a parent of the adoptive
parent (or the adoptive parent’s spouse
or former spouse); (3) the individual is
under the age of 18 at the time of the
adoption; and (4) the individual is not
adopted primarily for GST taxavoidance purposes. The determination
of whether an adoption is primarily for
GST tax-avoidance purposes is to be
made based upon all of the facts and
circumstances. The Treasury
Department and IRS believe that the
most significant factor to be considered
is whether there is a bona fide parent/
child relationship between the adoptive
parent and the adopted individual.
Other factors that may be considered
include (but are not limited to): the age
of the adopted individual at the time of
the adoption, and the relationship
between the adopted individual and the
individual’s parents immediately before
the adoption. Thus, the adoption of an
infant will be less likely to be
considered primarily for tax-avoidance
purposes than the adoption of an
individual who is age 17. Objective
evidence that the parent was unwilling
or unable to act as the individual’s
parent (e.g., the parent abandons the
individual, or is adjudicated
incompetent or incapacitated) may
indicate that an adoption is not
primarily for tax-avoidance purposes.
One commentator suggested clarifying
the interaction between section
2651(b)(3), regarding the treatment of
legal adoptions, and section 2651(f)(1),
regarding individuals assigned to more
than one generation. In order to provide
that clarification, the Treasury
Department and the IRS confirm that,
for purposes of chapter 13, a legal
adoption may create an additional
generation assignment, but the adoption
does not constitute a substitute for the
blood relationship. Specifically, an
individual who has been adopted will
be treated as a blood relative of the
adoptive parent under section
2651(b)(3) and generally is treated as a
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child of the adoptive parent under state
law. In spite of the adoption, however,
the adopted individual also continues to
be a blood relative of the individual’s
birth parents. Thus, the generation
assignment of the adopted individual
with regard to a transfer from an
ancestor of the birth parent, for
example, will continue to be measured
under section 2651(b), but, subject to
the exception in § 26.2651–2(b), the
relationship between them may be
subject to the special rule in section
2651(f)(1), which provides that an
individual who would be assigned to
more than one generation is assigned to
the youngest of those generations.
The proposed regulations provided
that any individual who dies no later
than 90 days after a transfer is treated
as having predeceased the transferor.
One commentator recommended that
the final regulations apply this 90-day
rule to inter vivos, as well as
testamentary, transfers. The 90-day rule
is intended to replace a similar 90-day
rule in § 26.2612–1(a)(2), which is
limited to testamentary transfers.
Moreover, many state statutes contain
similar rules that apply only to
testamentary transfers. Accordingly, the
final regulations do not adopt this
recommendation, and revise the
language of this provision to confirm
that it addresses only transfers occurring
by reason of the death of the transferor.
Two commentators requested
confirmation that the reference to
adoption in § 26.2651–2(b) applies
solely for purposes of the rule in section
2651(f)(1) and has no application to the
rule in section 2651(b). Accordingly, the
introductory language of § 26.2651–2(b)
has been revised.
of Associate Chief Counsel
(Passthroughs and Special Industries).
However, other personnel from the IRS
and Treasury Department participated
in their development.
Special Analyses
It has been determined that these
proposed regulations are not a
significant regulatory action as defined
in Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations and, because these
regulations do not impose a collection
of information on small entities, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, the notice
of proposed rulemaking preceding these
regulations was submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment
on their impact on small entities.
§ 26.2651–2 Individual assigned to more
than one generation.
(a) In general.
(b) Exception.
(c) Special rules.
(1) Corresponding generation adjustment.
(2) Continued application of generation
assignment.
(d) Example.
Drafting Information
The principal author of these
regulations is Lian A. Mito of the Office
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List of Subjects in 26 CFR Part 26
Estate taxes, Reporting and
recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 26 is
amended as follows:
I
PART 26—GENERATION-SKIPPING
TRANSFER TAX REGULATIONS
UNDER THE TAX REFORM ACT OF
1986
Paragraph 1. The authority citation for
part 26 continues to read, in part, as
follows:
I
Authority: 26 U.S.C. 7805 * * *
I Par. 2. In § 26.2600–1, the table is
amended by:
I 1. Removing the entries for § 26.2612–
1, paragraphs (a)(1) and (a)(2).
I 2. Adding entries for §§ 26.2651–1,
26.2651–2, and 26.2651–3.
The additions read as follows:
§ 26.2600–1
*
*
Table of contents.
*
*
*
§ 26.2651–1 Generation assignment.
(a) Special rule for persons with a deceased
parent.
(1) In general.
(2) Special rules.
(3) Established or derived.
(4) Special rule in the case of additional
contributions to a trust.
(a) Limited application to collateral heirs.
(b) Examples.
§ 26.2651–3 Effective dates.
(a) In general.
(b) Transition rule.
I Par. 3. Section 26.2612–1 is amended
by:
I 1. Removing the paragraph designation
and heading for (a)(1).
I 2. Removing paragraph (a)(2).
I 3. Removing the second sentence of
paragraph (f) introductory text.
I 4. Removing Examples 6 and 7 in
paragraph (f).
I 5. Redesignating Examples 8 through
15 as Examples 6 through 13 in
paragraph (f).
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Federal Register / Vol. 70, No. 136 / Monday, July 18, 2005 / Rules and Regulations
6. Revising the first sentence of newly
designated Example 7 in paragraph (f).
I 7. Revising the first sentence of newly
designated Example 11 in paragraph (f).
The revisions read as follows:
I
§ 26.2612–1
*
Definitions.
*
*
(f) * * *
*
*
Example 7. Taxable termination resulting
from distribution. The facts are the same as
in Example 6, except twenty years after C’s
death the trustee exercises its discretionary
power and distributes the entire principal to
GGC. * * *
*
*
*
*
*
Example 11. Exercise of withdrawal right
as taxable distribution. The facts are the
same as in Example 10, except GC holds a
continuing right to withdraw trust principal
and after one year GC withdraws $10,000.
* * *
*
*
*
*
*
Par. 4. Sections 26.2651–1, 26.2651–2
and 26.2651–3 are added to read as
follows:
I
§ 26.2651–1
Generation assignment.
(a) Special rule for persons with a
deceased parent—(1) In general. This
paragraph (a) applies for purposes of
determining whether a transfer to or for
the benefit of an individual who is a
descendant of a parent of the transferor
(or the transferor’s spouse or former
spouse) is a generation-skipping
transfer. If that individual’s parent, who
is a lineal descendant of the parent of
the transferor (or the transferor’s spouse
or former spouse), is deceased at the
time the transfer (from which an interest
of such individual is established or
derived) is subject to the tax imposed on
the transferor by chapter 11 or 12 of the
Internal Revenue Code, the individual is
treated as if that individual were a
member of the generation that is one
generation below the lower of—
(i) The transferor’s generation; or
(ii) The generation assignment of the
individual’s youngest living lineal
ancestor who is also a descendant of the
parent of the transferor (or the
transferor’s spouse or former spouse).
(2) Special rules—(i) Corresponding
generation adjustment. If an
individual’s generation assignment is
adjusted with respect to a transfer in
accordance with paragraph (a)(1) of this
section, a corresponding adjustment
with respect to that transfer is made to
the generation assignment of each—
(A) Spouse or former spouse of that
individual;
(B) Descendant of that individual; and
(C) Spouse or former spouse of each
descendant of that individual.
(ii) Continued application of
generation assignment. If a transfer to a
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trust would be a generation-skipping
transfer but for paragraph (a)(1) of this
section, any generation assignment
determined under this paragraph (a)
continues to apply in determining
whether any subsequent distribution
from (or termination of an interest in)
the portion of the trust attributable to
that transfer is a generation-skipping
transfer.
(iii) Ninety-day rule. For purposes of
paragraph (a)(1) of this section, any
individual who dies no later than 90
days after a transfer occurring by reason
of the death of the transferor is treated
as having predeceased the transferor.
(iv) Local law. A living person is not
treated as having predeceased the
transferor solely by reason of a
provision of applicable local law; e.g.,
an individual who disclaims is not
treated as a predeceased parent solely
because state law treats a disclaimant as
having predeceased the transferor for
purposes of determining the disposition
of the disclaimed property.
(3) Established or derived. For
purposes of section 2651(e) and
paragraph (a)(1) of this section, an
individual’s interest is established or
derived at the time the transferor is
subject to transfer tax on the property.
See § 26.2652–1(a) for the definition of
a transferor. If the same transferor, on
more than one occasion, is subject to
transfer tax imposed by either chapter
11 or 12 of the Internal Revenue Code
on the property so transferred (whether
the same property, reinvestments
thereof, income thereon, or any or all of
these), then the relevant time for
determining whether paragraph (a)(1) of
this section applies is the earliest time
at which the transferor is subject to the
tax imposed by either chapter 11 or 12
of the Internal Revenue Code. For
purposes of section 2651(e) and
paragraph (a)(1) of this section, the
interest of a remainder beneficiary of a
trust for which an election under
section 2523(f) or section 2056(b)(7)
(QTIP election) has been made will be
deemed to have been established or
derived, to the extent of the QTIP
election, on the date as of which the
value of the trust corpus is first subject
to tax under section 2519 or section
2044. The preceding sentence does not
apply to a trust, however, to the extent
that an election under section 2652(a)(3)
(reverse QTIP election) has been made
for the trust because, to the extent of a
reverse QTIP election, the spouse who
established the trust will remain the
transferor of the trust for generationskipping transfer tax purposes.
(4) Special rule in the case of
additional contributions to a trust. If a
transferor referred to in paragraph (a)(1)
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of this section contributes additional
property to a trust that existed before
the application of paragraph (a)(1), then
the additional property is treated as
being held in a separate trust for
purposes of chapter 13 of the Internal
Revenue Code. The provisions of
§ 26.2654–1(a)(2), regarding treatment as
separate trusts, apply as if different
transferors had contributed to the
separate portions of the single trust.
Additional subsequent contributions
from that transferor will be added to the
new share that is treated as a separate
trust.
(b) Limited application to collateral
heirs. Paragraph (a) of this section does
not apply in the case of a transfer to any
individual who is not a lineal
descendant of the transferor (or the
transferor’s spouse or former spouse) if
the transferor has any living lineal
descendant at the time of the transfer.
(c) Examples. The following examples
illustrate the provisions of this section:
Example 1. T establishes an irrevocable
trust, Trust, providing that trust income is to
be paid to T’s grandchild, GC, for 5 years. At
the end of the 5-year period or on GC’s prior
death, Trust is to terminate and the principal
is to be distributed to GC if GC is living or
to GC’s children if GC has died. The transfer
that occurred on the creation of the trust is
subject to the tax imposed by chapter 12 of
the Internal Revenue Code and, at the time
of the transfer, T’s child, C, who is a parent
of GC, is deceased. GC is treated as a member
of the generation that is one generation below
T’s generation. As a result, GC is not a skip
person and Trust is not a skip person.
Therefore, the transfer to Trust is not a direct
skip. Similarly, distributions to GC during
the term of Trust and at the termination of
Trust will not be GSTs.
Example 2. On January 1, 2004, T transfers
$100,000 to an irrevocable inter vivos trust
that provides T with an annuity payable for
four years or until T’s prior death. The
annuity satisfies the definition of a qualified
interest under section 2702(b). When the
trust terminates, the corpus is to be paid to
T’s grandchild, GC. The transfer is subject to
the tax imposed by chapter 12 of the Internal
Revenue Code and, at the time of the transfer,
T’s child, C, who is a parent of GC, is living.
C dies in 2006. In this case, C was alive at
the time the transfer by T was subject to the
tax imposed by chapter 12 of the Internal
Revenue Code. Therefore, section 2651(e)
and paragraph (a)(1) of this section do not
apply. When the trust subsequently
terminates, the distribution to GC is a taxable
termination that is subject to the GST tax to
the extent the trust has an inclusion ratio
greater than zero. See section 2642(a).
Example 3. T dies testate in 2002, survived
by T’s spouse, S, their children, C1 and C2,
and C1’s child, GC. Under the terms of T’s
will, a trust is established for the benefit of
S and of T and S’s descendants. Under the
terms of the trust, all income is payable to
S during S’s lifetime and the trustee may
distribute trust corpus for S’s health, support
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and maintenance. At S’s death, the corpus is
to be distributed, outright, to C1 and C2. If
either C1 or C2 has predeceased S, the
deceased child’s share of the corpus is to be
distributed to that child’s then-living
descendants, per stirpes. The executor of T’s
estate makes the election under section
2056(b)(7) to treat the trust property as
qualified terminable interest property (QTIP)
but does not make the election under section
2652(a)(3) (reverse QTIP election). In 2003,
C1 dies survived by S and GC. In 2004, S
dies, and the trust terminates. The full fair
market value of the trust is includible in S’s
gross estate under section 2044 and S
becomes the transferor of the trust under
section 2652(a)(1)(A). GC’s interest is
considered established or derived at S’s
death, and because C1 is deceased at that
time, GC is treated as a member of the
generation that is one generation below the
generation of the transferor, S. As a result, GC
is not a skip person and the transfer to GC
is not a direct skip.
Example 4. The facts are the same as in
Example 3. However, the executor of T’s
estate makes the election under section
2652(a)(3) (reverse QTIP election) for the
entire trust. Therefore, T remains the
transferor because, for purposes of chapter 13
of the Internal Revenue Code, the election to
be treated as qualified terminable interest
property is treated as if it had not been made.
In this case, GC’s interest is established or
derived on T’s death in 2002. Because C1 was
living at the time of T’s death, the
predeceased parent rule under section
2651(e) does not apply, even though C1 was
deceased at the time the transfer from S to
GC was subject to the tax under chapter 11
of the Internal Revenue Code. When the trust
terminates, the distribution to GC is a taxable
termination that is subject to the GST tax to
the extent the trust has an inclusion ratio
greater than zero. See section 2642(a).
Example 5. T establishes an irrevocable
trust providing that trust income is to be paid
to T’s grandniece, GN, for 5 years or until
GN’s prior death. At the end of the 5-year
period or on GN’s prior death, the trust is to
terminate and the principal is to be
distributed to GN if living, or if GN has died,
to GN’s then-living descendants, per stirpes.
S is a sibling of T and the parent of N. N is
the parent of GN. At the time of the transfer,
T has no living lineal descendant, S is living,
N is deceased, and the transfer is subject to
the gift tax imposed by chapter 12 of the
Internal Revenue Code. GN is treated as a
member of the generation that is one
generation below T’s generation because S,
GN’s youngest living lineal ancestor who is
also a descendant of T’s parent, is in T’s
generation. As a result, GN is not a skip
person and the transfer to the trust is not a
direct skip. In addition, distributions to GN
during the term of the trust and at the
termination of the trust will not be GSTs.
Example 6. On January 1, 2004, T transfers
$50,000 to a great-grandniece, GGN, who is
the great-grandchild of B, a brother of T. At
the time of the transfer, T has no living lineal
descendants and B’s grandchild, GN, who is
a parent of GGN and a child of B’s living
child, N, is deceased. GGN will be treated as
a member of the generation that is one
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generation below the lower of T’s generation
or the generation assignment of GGN’s
youngest living lineal ancestor who is also a
descendant of the parent of the transferor. In
this case, N is GGN’s youngest living lineal
ancestor who is also a descendant of the
parent of T. Because N’s generation
assignment is lower than T’s generation, GGN
will be treated as a member of the generation
that is one generation below N’s generation
assignment (i.e., GGN will be treated as a
member of her parent’s generation). As a
result, GGN remains a skip person and the
transfer to GGN is a direct skip.
Example 7. T has a child, C. C and C’s
spouse, S, have a 20-year-old child, GC. C
dies and S subsequently marries S2. S2
legally adopts GC. T transfers $100,000 to
GC. Under section 2651(b)(1), GC is assigned
to the generation that is two generations
below T. However, since GC’s parent, C, is
deceased at the time of the transfer, GC will
be treated as a member of the generation that
is one generation below T. As a result, GC is
not a skip person and the transfer to GC is
not a direct skip.
§ 26.2651–2 Individual assigned to more
than 1 generation.
(a) In general. Except as provided in
paragraph (b) or (c) of this section, an
individual who would be assigned to
more than 1 generation is assigned to
the youngest of the generations to which
that individual would be assigned.
(b) Exception. Notwithstanding
paragraph (a) of this section, an adopted
individual (as defined in this paragraph)
will be treated as a member of the
generation that is one generation below
the adoptive parent for purposes of
determining whether a transfer to the
adopted individual from the adoptive
parent (or the spouse or former spouse
of the adoptive parent, or a lineal
descendant of a grandparent of the
adoptive parent) is subject to chapter 13
of the Internal Revenue Code. For
purposes of this paragraph (b), an
adopted individual is an individual who
is—
(1) Legally adopted by the adoptive
parent;
(2) A descendant of a parent of the
adoptive parent (or the spouse or former
spouse of the adoptive parent);
(3) Under the age of 18 at the time of
the adoption; and
(4) Not adopted primarily for the
purpose of avoiding GST tax. The
determination of whether an adoption is
primarily for GST tax-avoidance
purposes is made based upon all of the
facts and circumstances. The most
significant factor is whether there is a
bona fide parent/child relationship
between the adoptive parent and the
adopted individual, in which the
adoptive parent has fully assumed all
significant responsibilities for the care
and raising of the adopted child. Other
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41143
factors may include (but are not limited
to), at the time of the adoption—
(i) The age of the adopted individual
(for example, the younger the age of the
adopted individual, or the age of the
youngest of siblings who are all adopted
together, the more likely the adoption
will not be considered primarily for
GST tax-avoidance purposes); and
(ii) The relationship between the
adopted individual and the individual’s
parents (for example, objective evidence
of the absence or incapacity of the
parents may indicate that the adoption
is not primarily for GST tax-avoidance
purposes).
(c) Special rules—(1) Corresponding
generation adjustment. If an
individual’s generation assignment is
adjusted with respect to a transfer in
accordance with paragraph (b) of this
section, a corresponding adjustment
with respect to that transfer is made to
the generation assignment of each—
(i) Spouse or former spouse of that
individual;
(ii) Descendant of that individual; and
(iii) Spouse or former spouse of each
descendant of that individual.
(2) Continued application of
generation assignment. If a transfer to a
trust would be a generation-skipping
transfer but for paragraph (b) of this
section, any generation assignment
determined under paragraph (b) or (c) of
this section continues to apply in
determining whether any subsequent
distribution from (or termination of an
interest in) the portion of the trust
attributable to that transfer is a
generation-skipping transfer.
(d) Example. The following example
illustrates the provisions of this section:
Example. T has a child, C. C has a 20-yearold child, GC. T legally adopts GC and
transfers $100,000 to GC. GC’s generation
assignment is determined by section
2651(b)(1) and GC is assigned to the
generation that is two generations below T.
In addition, because T has legally adopted
GC, GC is generally treated as a child of T
under state law. Under these circumstances,
GC is an individual who is assigned to more
than one generation and the exception in
§ 26.2651–2(b) does not apply. Thus, the
special rule under section 2651(f)(1) applies
and GC is assigned to the generation that is
two generations below T. GC remains a skip
person with respect to T and the transfer to
GC is a direct skip.
§ 26.2651–3
Effective dates.
(a) In general. The rules of
§§ 26.2651–1 and 26.2651–2 are
applicable for terminations,
distributions, and transfers occurring on
or after July 18, 2005.
(b) Transition rule. In the case of
transfers occurring after December 31,
1997, and before July 18, 2005,
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Federal Register / Vol. 70, No. 136 / Monday, July 18, 2005 / Rules and Regulations
taxpayers may rely on any reasonable
interpretation of section 2651(e). For
this purpose, these final regulations, as
well as the proposed regulations issued
on September 3, 2004 (69 FR 53862), are
treated as a reasonable interpretation of
the statute.
Mark E. Matthews,
Deputy Commissioner for Services and
Enforcement.
Approved: June 30, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary of the
Treasury.
[FR Doc. 05–13799 Filed 7–15–05; 8:45 am]
BILLING CODE 4830–01–P
DEPARTMENT OF THE TREASURY
26 CFR Part 301
[TD 9215]
RIN 1545–BC46
Substitute for Return
Internal Revenue Service (IRS),
Treasury.
ACTION: Temporary regulations and
removal of final regulations.
AGENCY:
SUMMARY: This document contains
temporary regulations relating to returns
prepared or signed by the Commissioner
or other internal revenue officers or
employees under section 6020 of the
Internal Revenue Code. The text of the
temporary regulations also serves as the
text of the proposed regulations set forth
in the notice of proposed rulemaking on
this subject in the Proposed Rules
section of this issue of the Federal
Register.
Effective Date: These regulations
are effective July 18, 2005.
Applicability Date: For dates of
applicability, see § 301.6020–1(d).
FOR FURTHER INFORMATION CONTACT:
Tracey B. Leibowitz, (202) 622–4940
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
DATES:
Background and Explanation of
Provisions
This document contains amendments
to 26 CFR part 301 under section 6020
of the Internal Revenue Code (Code), 26
U.S.C. sec. 6020. Section 301.6020–1 of
the Procedure and Administration
Regulations provides for the preparation
or execution of returns by authorized
internal revenue officers or employees.
Section 1301(a) of the Taxpayer Bill of
Rights Act of 1996, Pub. L. 104–168 (110
Stat. 1452), amended section 6651 to
add subsection (g)(2), which provides
that, for returns due after July 30, 1996
VerDate jul<14>2003
15:29 Jul 15, 2005
Jkt 205001
(determined without regard to
extensions), a return made under
section 6020(b) shall be treated as a
return filed by the taxpayer for purposes
of determining the amount of the
additions to tax under section 6651(a)(2)
and (a)(3). Absent the existence of a
return under section 6020(b), the
addition to tax under section 6651(a)(2)
does not apply to a nonfiler.
In Cabirac v. Commissioner, 120 T.C.
163 (2003), aff’d in an unpublished
opinion, No. 03–3157 (3rd Cir. Feb. 10,
2004), and Spurlock v. Commissioner,
T.C. Memo. 2003–124, the Tax Court
found that the Service did not establish
that it had prepared and signed a return
in accordance with section 6020(b). In
Spurlock, the Tax Court held that a
return for section 6020(b) purposes must
be subscribed, contain sufficient
information from which to compute the
taxpayer’s tax liability, and the return
and any attachments must ‘‘purport to
be a return.’’ Spurlock, slip op. at 27.
These temporary regulations provide
that a document (or set of documents)
signed by an authorized internal
revenue officer or employee is a return
under section 6020(b) if the document
(or set of documents) identifies the
taxpayer by name and taxpayer
identification number, contains
sufficient information from which to
compute the taxpayer’s tax liability, and
the document (or set of documents)
purports to be a return under section
6020(b). A Form 13496, ‘‘IRC Section
6020(b) Certification,’’ or any other form
that an authorized internal revenue
officer or employee signs and uses to
identify a document (or set of
documents) containing the information
set forth above as a section 6020(b)
return, and the documents identified,
constitute a valid section 6020(b) return.
Further, because the Service prepares
and signs section 6020(b) returns both
by hand and through automated means,
these regulations provide that a name or
title of an internal revenue officer or
employee appearing upon a return made
in accordance with section 6020(b) is
sufficient as a subscription by that
officer or employee to adopt the
document as a return for the taxpayer
without regard to whether the name or
title is handwritten, stamped, typed,
printed, or otherwise mechanically
affixed to the document. The document
or set of documents and subscription
may be in written or electronic form.
These temporary regulations do not
alter the method for the preparation of
returns under section 6020(a) as
provided in TD 6498. Under section
6020(a), if the taxpayer consents to
disclose necessary information, the
Service may prepare a return on behalf
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Fmt 4700
Sfmt 4700
of a taxpayer, and if the taxpayer signs
the return, the Service will receive it as
the taxpayer’s return.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations. For applicability of
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) please refer to the crossreference notice of proposed rulemaking
published elsewhere in this issue of the
Federal Register. Pursuant to section
7805(f) of the Code, this notice of
proposed rulemaking was submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for
comment on its impact on small
businesses.
Drafting Information
The principal author of these
regulations is Tracey B. Leibowitz, of
the Office of the Associate Chief
Counsel (Procedure and
Administration), Administrative
Provisions and Judicial Practice
Division.
List of Subjects in 26 CFR Part 301
Employment taxes, Estate taxes,
Excise taxes, Gift taxes, Income taxes,
Penalties, Reporting and recordkeeping
requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 301 is
amended as follows:
I
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation
continues to read, in part, as follows:
I
Authority: 26 U.S.C. 7805 * * *
§ 301.6020–1
[Removed]
Par. 2. Section 301.6020–1 is removed.
I Par. 3. Section 301.6020–1T is added
to read as follows:
I
§ 301.6020–1T Returns prepared or
executed by the Commissioner or other
internal revenue officers (temporary).
(a) Preparation of returns—(1) In
general. If any person required by the
Code or by the regulations prescribed
thereunder to make a return fails to
make such return, it may be prepared by
the Commissioner or other authorized
internal revenue officer or employee
provided such person consents to
disclose all information necessary for
E:\FR\FM\18JYR1.SGM
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]]>Agencies
[Federal Register Volume 70, Number 136 (Monday, July 18, 2005)]
[Rules and Regulations]
[Pages 41140-41144]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-13799]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 26
[TD 9214]
RIN 1545-BC60
Predeceased Parent Rule
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final regulations relating to the
predeceased parent rule, which provides an exception to the general
rules of section 2651 of the Internal Revenue Code (Code) for
determining the generation assignment of a transferee of property for
generation-skipping transfer (GST) tax purposes. These regulations also
provide rules regarding a transferee assigned to more than one
generation. The regulations reflect changes to the law made by the
Taxpayer Relief Act of 1997 and generally apply to individuals, trusts,
and estates.
DATES: Effective Date: These regulations are effective July 18, 2005.
FOR FURTHER INFORMATION CONTACT: Lian A. Mito at (202) 622-7830 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On September 3, 2004, a notice of proposed rulemaking (REG-145988-
03) relating to the predeceased parent rule was published in the
Federal Register (69 FR 53862). The public hearing scheduled for
December 14, 2004, was cancelled because no requests to speak were
received. Written comments responding to the notice of proposed
rulemaking were received. After consideration of all the comments, the
proposed regulations are adopted as amended by this Treasury decision.
The revisions are discussed below.
Summary of Comments
The proposed regulations provided that, for purposes of determining
whether the predeceased parent rule applies, an individual transferee's
interest in property is established or derived at the time the
transferor who transferred the property is subject to either the gift
or estate tax on the property. If the transferor will be subject to a
transfer tax imposed on the property transferred on more than one
occasion, then the relevant time for determining whether the
predeceased parent rule applies is the earliest time at which the
transferor is subject to the gift or estate tax. In the case of a trust
for which an election under section 2056(b)(7) (QTIP election) has been
made, the proposed regulations provided that the interest of the
remainder beneficiary is considered as established or derived when the
QTIP trust was established. However, the proposed regulations also
included an exception to this general rule by providing that, to the
extent of the QTIP (but not a reverse QTIP) election, the remainder
beneficiary's interest is deemed to have been established or derived on
the death of the transferor's spouse (the income beneficiary), rather
than on the transferor's earlier death.
One commentator indicated that this exception is unnecessary. The
commentator believes that the proposed regulations misinterpreted the
statute because a remainder beneficiary's interest in a trust that is
subject to a QTIP (but not a reverse QTIP) election should always be
deemed to have been established, not at the time of the trust's
creation, but rather at the time when the income-beneficiary spouse is
first subject to gift or estate tax on the trust property. This
position applies the definition of ``transferor'' in section 2652 in
the context of the reference to ``established and derived'' in section
2651(e), and is based on the conclusion that the tax in this situation
is not imposed on the same transferor on more than one occasion. Thus,
because the donee or surviving spouse becomes the transferor of a trust
that is subject to a QTIP (but not reverse QTIP) election, the
remainder beneficiary's interest in such a trust is established upon
that spouse's gift of an interest in the trust or that spouse's death,
in each case the time at which gift or estate tax on the trust is first
imposed on that spouse. Viewed from this perspective, this provision of
the proposed regulations is not an exception. The Treasury Department
and the IRS agree, and the final regulations adopt the suggested
change.
Under the proposed regulations, the predeceased parent rule does
not apply to transfers to collateral heirs if, at the time of the
transfer, ``the transferor (or the transferor's spouse or former
spouse) has any living lineal descendant.'' Thus, under the proposed
regulations, if, at the time of the transfer, the transferor has no
living lineal descendants but the transferor's spouse or former spouse
does, the predeceased parent rule will not apply to any transfer by the
transferor to a collateral heir. A number of commentators pointed out
that the parenthetical language is inconsistent with the purpose and
language of the statute, and will inappropriately narrow the
application of the predeceased parent rule with respect to collateral
heirs. The Treasury Department and the IRS agree, and the parenthetical
language is removed in the final regulations. Accordingly, the final
regulations require that, for the predeceased parent rule to apply to
transfers to collateral heirs, only the transferor must have no living
lineal descendants at the time of the transfer.
The proposed regulations provided an exception to the general rule
that assigns an individual to the youngest of the generations to which
that individual may be assigned. Under the exception, an adopted
individual will be treated as a member of the generation that is one
generation below the adoptive parent for purposes of determining
whether a transfer to the adopted individual from the adoptive parent
(or the spouse or former spouse of the adoptive parent, or a lineal
descendant of a grandparent of the adoptive parent) is subject to the
GST tax. The proposed regulations defined an ``adopted individual'' as
an individual who is: (1) A descendant of a parent of the adoptive
parent (or the spouse or former spouse of the adoptive parent); and (2)
under the age of 18 at the time of the adoption.
Two commentators expressed concern that this objective test
(specifically, the age at the time of the adoption) provides a strong
inducement to engage in a tax-motivated adoption, particularly in the
case of older minors, because of the amount of GST tax that thereby may
be avoided. One commentator suggested lowering the limit on the age of
the individual at the time of the adoption for purposes of the test.
The other commentator recommended adding a third element to the
definition of adopted individual, namely, that the individual was not
adopted primarily for tax-avoidance purposes.
[[Page 41141]]
The Treasury Department and the IRS continue to believe that
certain adopted minors should be treated as a member of the generation
that is one generation below the adoptive parent, but only if the
adoption is not primarily for the purpose of avoiding GST tax.
Therefore, under the final regulations, the adopted individual will be
treated as a member of the generation that is one generation below the
adoptive parent for purposes of determining whether transfers from
certain individuals to the adopted individual are subject to GST tax if
the following requirements are satisfied: (1) The individual is legally
adopted by the adoptive parent; (2) the individual is a descendant of a
parent of the adoptive parent (or the adoptive parent's spouse or
former spouse); (3) the individual is under the age of 18 at the time
of the adoption; and (4) the individual is not adopted primarily for
GST tax-avoidance purposes. The determination of whether an adoption is
primarily for GST tax-avoidance purposes is to be made based upon all
of the facts and circumstances. The Treasury Department and IRS believe
that the most significant factor to be considered is whether there is a
bona fide parent/child relationship between the adoptive parent and the
adopted individual. Other factors that may be considered include (but
are not limited to): the age of the adopted individual at the time of
the adoption, and the relationship between the adopted individual and
the individual's parents immediately before the adoption. Thus, the
adoption of an infant will be less likely to be considered primarily
for tax-avoidance purposes than the adoption of an individual who is
age 17. Objective evidence that the parent was unwilling or unable to
act as the individual's parent (e.g., the parent abandons the
individual, or is adjudicated incompetent or incapacitated) may
indicate that an adoption is not primarily for tax-avoidance purposes.
One commentator suggested clarifying the interaction between
section 2651(b)(3), regarding the treatment of legal adoptions, and
section 2651(f)(1), regarding individuals assigned to more than one
generation. In order to provide that clarification, the Treasury
Department and the IRS confirm that, for purposes of chapter 13, a
legal adoption may create an additional generation assignment, but the
adoption does not constitute a substitute for the blood relationship.
Specifically, an individual who has been adopted will be treated as a
blood relative of the adoptive parent under section 2651(b)(3) and
generally is treated as a child of the adoptive parent under state law.
In spite of the adoption, however, the adopted individual also
continues to be a blood relative of the individual's birth parents.
Thus, the generation assignment of the adopted individual with regard
to a transfer from an ancestor of the birth parent, for example, will
continue to be measured under section 2651(b), but, subject to the
exception in Sec. 26.2651-2(b), the relationship between them may be
subject to the special rule in section 2651(f)(1), which provides that
an individual who would be assigned to more than one generation is
assigned to the youngest of those generations.
The proposed regulations provided that any individual who dies no
later than 90 days after a transfer is treated as having predeceased
the transferor. One commentator recommended that the final regulations
apply this 90-day rule to inter vivos, as well as testamentary,
transfers. The 90-day rule is intended to replace a similar 90-day rule
in Sec. 26.2612-1(a)(2), which is limited to testamentary transfers.
Moreover, many state statutes contain similar rules that apply only to
testamentary transfers. Accordingly, the final regulations do not adopt
this recommendation, and revise the language of this provision to
confirm that it addresses only transfers occurring by reason of the
death of the transferor.
Two commentators requested confirmation that the reference to
adoption in Sec. 26.2651-2(b) applies solely for purposes of the rule
in section 2651(f)(1) and has no application to the rule in section
2651(b). Accordingly, the introductory language of Sec. 26.2651-2(b)
has been revised.
Special Analyses
It has been determined that these proposed regulations are not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations and, because
these regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Code, the notice of proposed
rulemaking preceding these regulations was submitted to the Chief
Counsel for Advocacy of the Small Business Administration for comment
on their impact on small entities.
Drafting Information
The principal author of these regulations is Lian A. Mito of the
Office of Associate Chief Counsel (Passthroughs and Special
Industries). However, other personnel from the IRS and Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 26
Estate taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations
0
Accordingly, 26 CFR part 26 is amended as follows:
PART 26--GENERATION-SKIPPING TRANSFER TAX REGULATIONS UNDER THE TAX
REFORM ACT OF 1986
0
Paragraph 1. The authority citation for part 26 continues to read, in
part, as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. In Sec. 26.2600-1, the table is amended by:
0
1. Removing the entries for Sec. 26.2612-1, paragraphs (a)(1) and
(a)(2).
0
2. Adding entries for Sec. Sec. 26.2651-1, 26.2651-2, and 26.2651-3.
The additions read as follows:
Sec. 26.2600-1 Table of contents.
* * * * *
Sec. 26.2651-1 Generation assignment.
(a) Special rule for persons with a deceased parent.
(1) In general.
(2) Special rules.
(3) Established or derived.
(4) Special rule in the case of additional contributions to a
trust.
(a) Limited application to collateral heirs.
(b) Examples.
Sec. 26.2651-2 Individual assigned to more than one generation.
(a) In general.
(b) Exception.
(c) Special rules.
(1) Corresponding generation adjustment.
(2) Continued application of generation assignment.
(d) Example.
Sec. 26.2651-3 Effective dates.
(a) In general.
(b) Transition rule.
0
Par. 3. Section 26.2612-1 is amended by:
0
1. Removing the paragraph designation and heading for (a)(1).
0
2. Removing paragraph (a)(2).
0
3. Removing the second sentence of paragraph (f) introductory text.
0
4. Removing Examples 6 and 7 in paragraph (f).
0
5. Redesignating Examples 8 through 15 as Examples 6 through 13 in
paragraph (f).
[[Page 41142]]
0
6. Revising the first sentence of newly designated Example 7 in
paragraph (f).
0
7. Revising the first sentence of newly designated Example 11 in
paragraph (f).
The revisions read as follows:
Sec. 26.2612-1 Definitions.
* * * * *
(f) * * *
Example 7. Taxable termination resulting from distribution. The
facts are the same as in Example 6, except twenty years after C's
death the trustee exercises its discretionary power and distributes
the entire principal to GGC. * * *
* * * * *
Example 11. Exercise of withdrawal right as taxable
distribution. The facts are the same as in Example 10, except GC
holds a continuing right to withdraw trust principal and after one
year GC withdraws $10,000. * * *
* * * * *
0
Par. 4. Sections 26.2651-1, 26.2651-2 and 26.2651-3 are added to read
as follows:
Sec. 26.2651-1 Generation assignment.
(a) Special rule for persons with a deceased parent--(1) In
general. This paragraph (a) applies for purposes of determining whether
a transfer to or for the benefit of an individual who is a descendant
of a parent of the transferor (or the transferor's spouse or former
spouse) is a generation-skipping transfer. If that individual's parent,
who is a lineal descendant of the parent of the transferor (or the
transferor's spouse or former spouse), is deceased at the time the
transfer (from which an interest of such individual is established or
derived) is subject to the tax imposed on the transferor by chapter 11
or 12 of the Internal Revenue Code, the individual is treated as if
that individual were a member of the generation that is one generation
below the lower of--
(i) The transferor's generation; or
(ii) The generation assignment of the individual's youngest living
lineal ancestor who is also a descendant of the parent of the
transferor (or the transferor's spouse or former spouse).
(2) Special rules--(i) Corresponding generation adjustment. If an
individual's generation assignment is adjusted with respect to a
transfer in accordance with paragraph (a)(1) of this section, a
corresponding adjustment with respect to that transfer is made to the
generation assignment of each--
(A) Spouse or former spouse of that individual;
(B) Descendant of that individual; and
(C) Spouse or former spouse of each descendant of that individual.
(ii) Continued application of generation assignment. If a transfer
to a trust would be a generation-skipping transfer but for paragraph
(a)(1) of this section, any generation assignment determined under this
paragraph (a) continues to apply in determining whether any subsequent
distribution from (or termination of an interest in) the portion of the
trust attributable to that transfer is a generation-skipping transfer.
(iii) Ninety-day rule. For purposes of paragraph (a)(1) of this
section, any individual who dies no later than 90 days after a transfer
occurring by reason of the death of the transferor is treated as having
predeceased the transferor.
(iv) Local law. A living person is not treated as having
predeceased the transferor solely by reason of a provision of
applicable local law; e.g., an individual who disclaims is not treated
as a predeceased parent solely because state law treats a disclaimant
as having predeceased the transferor for purposes of determining the
disposition of the disclaimed property.
(3) Established or derived. For purposes of section 2651(e) and
paragraph (a)(1) of this section, an individual's interest is
established or derived at the time the transferor is subject to
transfer tax on the property. See Sec. 26.2652-1(a) for the definition
of a transferor. If the same transferor, on more than one occasion, is
subject to transfer tax imposed by either chapter 11 or 12 of the
Internal Revenue Code on the property so transferred (whether the same
property, reinvestments thereof, income thereon, or any or all of
these), then the relevant time for determining whether paragraph (a)(1)
of this section applies is the earliest time at which the transferor is
subject to the tax imposed by either chapter 11 or 12 of the Internal
Revenue Code. For purposes of section 2651(e) and paragraph (a)(1) of
this section, the interest of a remainder beneficiary of a trust for
which an election under section 2523(f) or section 2056(b)(7) (QTIP
election) has been made will be deemed to have been established or
derived, to the extent of the QTIP election, on the date as of which
the value of the trust corpus is first subject to tax under section
2519 or section 2044. The preceding sentence does not apply to a trust,
however, to the extent that an election under section 2652(a)(3)
(reverse QTIP election) has been made for the trust because, to the
extent of a reverse QTIP election, the spouse who established the trust
will remain the transferor of the trust for generation-skipping
transfer tax purposes.
(4) Special rule in the case of additional contributions to a
trust. If a transferor referred to in paragraph (a)(1) of this section
contributes additional property to a trust that existed before the
application of paragraph (a)(1), then the additional property is
treated as being held in a separate trust for purposes of chapter 13 of
the Internal Revenue Code. The provisions of Sec. 26.2654-1(a)(2),
regarding treatment as separate trusts, apply as if different
transferors had contributed to the separate portions of the single
trust. Additional subsequent contributions from that transferor will be
added to the new share that is treated as a separate trust.
(b) Limited application to collateral heirs. Paragraph (a) of this
section does not apply in the case of a transfer to any individual who
is not a lineal descendant of the transferor (or the transferor's
spouse or former spouse) if the transferor has any living lineal
descendant at the time of the transfer.
(c) Examples. The following examples illustrate the provisions of
this section:
Example 1. T establishes an irrevocable trust, Trust, providing
that trust income is to be paid to T's grandchild, GC, for 5 years.
At the end of the 5-year period or on GC's prior death, Trust is to
terminate and the principal is to be distributed to GC if GC is
living or to GC's children if GC has died. The transfer that
occurred on the creation of the trust is subject to the tax imposed
by chapter 12 of the Internal Revenue Code and, at the time of the
transfer, T's child, C, who is a parent of GC, is deceased. GC is
treated as a member of the generation that is one generation below
T's generation. As a result, GC is not a skip person and Trust is
not a skip person. Therefore, the transfer to Trust is not a direct
skip. Similarly, distributions to GC during the term of Trust and at
the termination of Trust will not be GSTs.
Example 2. On January 1, 2004, T transfers $100,000 to an
irrevocable inter vivos trust that provides T with an annuity
payable for four years or until T's prior death. The annuity
satisfies the definition of a qualified interest under section
2702(b). When the trust terminates, the corpus is to be paid to T's
grandchild, GC. The transfer is subject to the tax imposed by
chapter 12 of the Internal Revenue Code and, at the time of the
transfer, T's child, C, who is a parent of GC, is living. C dies in
2006. In this case, C was alive at the time the transfer by T was
subject to the tax imposed by chapter 12 of the Internal Revenue
Code. Therefore, section 2651(e) and paragraph (a)(1) of this
section do not apply. When the trust subsequently terminates, the
distribution to GC is a taxable termination that is subject to the
GST tax to the extent the trust has an inclusion ratio greater than
zero. See section 2642(a).
Example 3. T dies testate in 2002, survived by T's spouse, S,
their children, C1 and C2, and C1's child, GC. Under the terms of
T's will, a trust is established for the benefit of S and of T and
S's descendants. Under the terms of the trust, all income is payable
to S during S's lifetime and the trustee may distribute trust corpus
for S's health, support
[[Page 41143]]
and maintenance. At S's death, the corpus is to be distributed,
outright, to C1 and C2. If either C1 or C2 has predeceased S, the
deceased child's share of the corpus is to be distributed to that
child's then-living descendants, per stirpes. The executor of T's
estate makes the election under section 2056(b)(7) to treat the
trust property as qualified terminable interest property (QTIP) but
does not make the election under section 2652(a)(3) (reverse QTIP
election). In 2003, C1 dies survived by S and GC. In 2004, S dies,
and the trust terminates. The full fair market value of the trust is
includible in S's gross estate under section 2044 and S becomes the
transferor of the trust under section 2652(a)(1)(A). GC's interest
is considered established or derived at S's death, and because C1 is
deceased at that time, GC is treated as a member of the generation
that is one generation below the generation of the transferor, S. As
a result, GC is not a skip person and the transfer to GC is not a
direct skip.
Example 4. The facts are the same as in Example 3. However, the
executor of T's estate makes the election under section 2652(a)(3)
(reverse QTIP election) for the entire trust. Therefore, T remains
the transferor because, for purposes of chapter 13 of the Internal
Revenue Code, the election to be treated as qualified terminable
interest property is treated as if it had not been made. In this
case, GC's interest is established or derived on T's death in 2002.
Because C1 was living at the time of T's death, the predeceased
parent rule under section 2651(e) does not apply, even though C1 was
deceased at the time the transfer from S to GC was subject to the
tax under chapter 11 of the Internal Revenue Code. When the trust
terminates, the distribution to GC is a taxable termination that is
subject to the GST tax to the extent the trust has an inclusion
ratio greater than zero. See section 2642(a).
Example 5. T establishes an irrevocable trust providing that
trust income is to be paid to T's grandniece, GN, for 5 years or
until GN's prior death. At the end of the 5-year period or on GN's
prior death, the trust is to terminate and the principal is to be
distributed to GN if living, or if GN has died, to GN's then-living
descendants, per stirpes. S is a sibling of T and the parent of N. N
is the parent of GN. At the time of the transfer, T has no living
lineal descendant, S is living, N is deceased, and the transfer is
subject to the gift tax imposed by chapter 12 of the Internal
Revenue Code. GN is treated as a member of the generation that is
one generation below T's generation because S, GN's youngest living
lineal ancestor who is also a descendant of T's parent, is in T's
generation. As a result, GN is not a skip person and the transfer to
the trust is not a direct skip. In addition, distributions to GN
during the term of the trust and at the termination of the trust
will not be GSTs.
Example 6. On January 1, 2004, T transfers $50,000 to a great-
grandniece, GGN, who is the great-grandchild of B, a brother of T.
At the time of the transfer, T has no living lineal descendants and
B's grandchild, GN, who is a parent of GGN and a child of B's living
child, N, is deceased. GGN will be treated as a member of the
generation that is one generation below the lower of T's generation
or the generation assignment of GGN's youngest living lineal
ancestor who is also a descendant of the parent of the transferor.
In this case, N is GGN's youngest living lineal ancestor who is also
a descendant of the parent of T. Because N's generation assignment
is lower than T's generation, GGN will be treated as a member of the
generation that is one generation below N's generation assignment
(i.e., GGN will be treated as a member of her parent's generation).
As a result, GGN remains a skip person and the transfer to GGN is a
direct skip.
Example 7. T has a child, C. C and C's spouse, S, have a 20-
year-old child, GC. C dies and S subsequently marries S2. S2 legally
adopts GC. T transfers $100,000 to GC. Under section 2651(b)(1), GC
is assigned to the generation that is two generations below T.
However, since GC's parent, C, is deceased at the time of the
transfer, GC will be treated as a member of the generation that is
one generation below T. As a result, GC is not a skip person and the
transfer to GC is not a direct skip.
Sec. 26.2651-2 Individual assigned to more than 1 generation.
(a) In general. Except as provided in paragraph (b) or (c) of this
section, an individual who would be assigned to more than 1 generation
is assigned to the youngest of the generations to which that individual
would be assigned.
(b) Exception. Notwithstanding paragraph (a) of this section, an
adopted individual (as defined in this paragraph) will be treated as a
member of the generation that is one generation below the adoptive
parent for purposes of determining whether a transfer to the adopted
individual from the adoptive parent (or the spouse or former spouse of
the adoptive parent, or a lineal descendant of a grandparent of the
adoptive parent) is subject to chapter 13 of the Internal Revenue Code.
For purposes of this paragraph (b), an adopted individual is an
individual who is--
(1) Legally adopted by the adoptive parent;
(2) A descendant of a parent of the adoptive parent (or the spouse
or former spouse of the adoptive parent);
(3) Under the age of 18 at the time of the adoption; and
(4) Not adopted primarily for the purpose of avoiding GST tax. The
determination of whether an adoption is primarily for GST tax-avoidance
purposes is made based upon all of the facts and circumstances. The
most significant factor is whether there is a bona fide parent/child
relationship between the adoptive parent and the adopted individual, in
which the adoptive parent has fully assumed all significant
responsibilities for the care and raising of the adopted child. Other
factors may include (but are not limited to), at the time of the
adoption--
(i) The age of the adopted individual (for example, the younger the
age of the adopted individual, or the age of the youngest of siblings
who are all adopted together, the more likely the adoption will not be
considered primarily for GST tax-avoidance purposes); and
(ii) The relationship between the adopted individual and the
individual's parents (for example, objective evidence of the absence or
incapacity of the parents may indicate that the adoption is not
primarily for GST tax-avoidance purposes).
(c) Special rules--(1) Corresponding generation adjustment. If an
individual's generation assignment is adjusted with respect to a
transfer in accordance with paragraph (b) of this section, a
corresponding adjustment with respect to that transfer is made to the
generation assignment of each--
(i) Spouse or former spouse of that individual;
(ii) Descendant of that individual; and
(iii) Spouse or former spouse of each descendant of that
individual.
(2) Continued application of generation assignment. If a transfer
to a trust would be a generation-skipping transfer but for paragraph
(b) of this section, any generation assignment determined under
paragraph (b) or (c) of this section continues to apply in determining
whether any subsequent distribution from (or termination of an interest
in) the portion of the trust attributable to that transfer is a
generation-skipping transfer.
(d) Example. The following example illustrates the provisions of
this section:
Example. T has a child, C. C has a 20-year-old child, GC. T
legally adopts GC and transfers $100,000 to GC. GC's generation
assignment is determined by section 2651(b)(1) and GC is assigned to
the generation that is two generations below T. In addition, because
T has legally adopted GC, GC is generally treated as a child of T
under state law. Under these circumstances, GC is an individual who
is assigned to more than one generation and the exception in Sec.
26.2651-2(b) does not apply. Thus, the special rule under section
2651(f)(1) applies and GC is assigned to the generation that is two
generations below T. GC remains a skip person with respect to T and
the transfer to GC is a direct skip.
Sec. 26.2651-3 Effective dates.
(a) In general. The rules of Sec. Sec. 26.2651-1 and 26.2651-2 are
applicable for terminations, distributions, and transfers occurring on
or after July 18, 2005.
(b) Transition rule. In the case of transfers occurring after
December 31, 1997, and before July 18, 2005,
[[Page 41144]]
taxpayers may rely on any reasonable interpretation of section 2651(e).
For this purpose, these final regulations, as well as the proposed
regulations issued on September 3, 2004 (69 FR 53862), are treated as a
reasonable interpretation of the statute.
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Approved: June 30, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury.
[FR Doc. 05-13799 Filed 7-15-05; 8:45 am]
BILLING CODE 4830-01-P
