Severances of Trusts into GST Exempt, GST Nonexempt, and Other Portions

AuthorJerold I. Horn
ProfessionLawyer
Pages287-313
287
I. FORM 11.1: AUTHORIZATION TO SEVER AND SEGREGATE
(18) To divide, at any time (as of that or any earlier time), the trust estate of any
trust (before or after the trust is funded) into separate trusts of which the trust
estates consist of portions that at the actual time of division are, or (based on fair
market values) have the economic effect of, fractional shares of the trust estate of
the undivided trust, including, without limitation,
(i) portions that for United States generation-skipping tax purposes have
(or, if GST exemption were allocated, would have) different inclusion ratios,
(ii) the portions, respectively, to which a power of appointment or with-
drawal does, and does not (or, if the power were granted or, in the case of a
testamentary power, the donee immediately were to die, or both, would, and
would not), apply, and
(iii) portions that for United States generation-skipping tax purposes have
(or, if an election were made, would have) different transferors.
(19) To segregate and administer separately (including, without limitation, by
means of a separate share, fund or trust), at any time (as of that or any earlier time),
any property that is directed to be added to or disposed the same as other property
but that is distinctive for United States tax purposes.
A. Purpose of Form 11.1
Other things being equal, maximization of the present value of the GST exemption
requires allocation of the GST exemption in such manner as completely exempts a fund of
property rather than in such manner as partially exempts a fund. The duciary can make
nontaxable distributions to skip persons from a totally exempt fund. Correspondingly,
the duciary can make nontaxable distributions to nonskip persons from a totally non-
exempt fund. Distributions to skip persons from a partially exempt, partially nonexempt
11
Severances of Trusts into GST Exempt,
GST Nonexempt, and Other Portions
Cha pter 11288
fund will be taxable distributions. Distributions to nonskip persons from a partially
exempt, partially nonexempt fund will waste some of the GST exemption.
B. Drafti ng of For m 11.1
The transferor might fractionalize (or permit another to fractionalize) a disposition into
substantively identical portions, one intended to be entirely exempt, the other intended
to be entirely nonexempt. One procedure is to grant the duciary discretion to sever a
single trust into separate trusts. Drafting of permission for any discretionary severance
should parallel drafting for severance of property that can qualify as QTIP into a marital
portion and a nonmarital portion; that is, the severance should occur based upon fair
market values at the time of the severance. See Treas. Reg. §§ 20.2056(b)-7(b), 26.2654-
1(b)(1)(ii)(C), 26.2642-6(d)(4). If the severance is a qualied severance according to Code
Section 2642(a)(3), the severance of a single fund should produce separate funds that
after the severance and the allocation of GST exemption are, respectively, exempt and
nonexempt.
C. Form 11.2: Unallocated GST Exe mption
(G) Unallocated GST Exemption. Subject to any signication, outside this instru-
ment, of other intention, for purposes of determining any dispositions that are
dened by reference to my GST exemption that is unallocated immediately before
my death, my GST exemption that is unallocated immediately before my death shall
not include any amount that as of my death is necessary to reduce to zero the inclu-
sion ratios of (i) all property transferred in direct skips (other than any direct skip
that results from a disclaimer and other than the disposition that this subsection
(G) is being applied to determine at the particular time) of which I am the trans-
feror and (ii) each trust, to the extent of transfers during my life of which I am the
transferor, from which a taxable distribution or a taxable termination might occur
at or after my death and (a) that at any time before my death had an inclusion ratio
of zero because of allocation of GST exemption or (b) to which an intent to allocate
GST exemption is signied outside this instrument. My wife’s GST exemption that
is unallocated immediately before my wife’s death shall be determined according to
the preceding portion of this subsection (G) as if “wife’s” were inserted after “my”
each time “my” appears and as if “my wife is” were substituted for “I am.”
D. Purpose of Form 11.2
Use Form 11.2 only in revocable documents that use the concept of GST exemption unal-
located immediately before death. Form 11.2 is intended to except trusts (for example,

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