
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document affected by Public Law 107-16 Section 562(a)]
[Document affected by Public Law 107-16 Section 563(a),]
[Document affected by Public Law 107-16 Section 564(a)]
[Document affected by Public Law 107-16 Section 562(b)]
[Document affected by Public Law 107-16 Section 563(c)]
[Document affected by Public Law 107-16 Section 564(b)]
[CITE: 26USC2642]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                    Subtitle B--Estate and Gift Taxes
 
            CHAPTER 13--TAX ON GENERATION-SKIPPING TRANSFERS
 
             Subchapter E--Applicable Rate; Inclusion Ratio
 
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.

(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 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.

           (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 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..\1\
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    \1\ So in original.
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        (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.

(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, Secs. 11703(c)(1), (2), 11704(a)(17), (36), Nov. 
5, 1990, 104 Stat. 1388-517, 1388-519.)


                               Amendments

    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 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.

                  Section Referred to in Other Sections

    This section is referred to in section 2654 of this title.
