Qualified Trust Severance

§ 2642. Inclusion ratio(a) Inclusion ratio definedFor purposes of this chapter—(1) In generalExcept 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 fractionFor 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 generalIf 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 severanceFor purposes of subparagraph (A)—(i) In generalThe 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 zeroIf 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) RegulationsThe term “qualified severance” includes any other severance permitted under regulations prescribed by the Secretary. (C) Timing and manner of severancesA 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.