Qualified Severances for GST Tax Purposes
Final & Proposed Regulations issued August 2, 2007
By Julie K. Kwon
Under the law prior to the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) , the only severances recognized for GST purposes were those dividing single trusts already treated as separate trusts under Section 2654(b), based on the different beneficiaries’ separate and independent shares or its multiple transferors. Thus, if a single trust was severed into separate trusts recognized under applicable state law to resolve disputes among interested parties, the severance was not recognized for GST tax purposes and parties would remain yoked together for GST tax purposes. In addition, even if the severance of a single trust with an inclusion ratio between zero and one was recognized, it resulted in separate trusts with the same inclusion ratio as the original single trust.
EGTRRA introduced Section 2642(a)(3), which describes “qualified severances” that will result in trusts that will be treated as separate trusts thereafter for GST purposes. In addition, certain severances of trusts with inclusion ratios between zero and one will result in separate trusts with inclusion ratios of zero and one. Section 2642(a)(3) applies to severances occurring after December 31, 2000. Section 2642(a)(3) also states that the trusts resulting from a qualified severance will be treated as separate trusts “thereafter” for GST tax purposes, indicating that the qualified severance becomes effective at the time when it occurs.
On August 2, 2007, the Treasury Department issued both Final Regulations (T.D. 9348) and Proposed Regulations (Notice of Proposed Rulemaking REG-128843-05, 72 Fed. Reg. 48249 (August 2, 2007)) relating to qualified severances, to be effective from August 2, 2007.
Definition of Qualified Severance.
Regulation §26.2642-6(b) itemizes the requirements for a qualified severance:
The severance of a single trust (other than a division described in Regulation §26.2654-1(b) which addresses divisions of trusts included in the transferor’s gross estate) pursuant to the governing instrument or applicable local law.
The severance is effective under local law. Section 2642(a)(3) states that “any means available under” local law or the trust instrument will be effective. Accordingly, even in the absence of the specific power to sever in the trust instrument or state statute, a severance by judicial order or other means available under local law should suffice for purposes of Section 2642(a)(3).
The date of severance is either the date selected by the trustee as of which the trust assets are to be valued to fund the resulting trusts, or the court-imposed date of funding where the local court with jurisdiction over the trust has ordered the trustee to fund the resulting trusts on or as of a specific date. However, a date will only qualify under the regulation if funding must commence immediately, and funding must occur within a reasonable time (but in no event more than 90 days) after, that selected valuation date. This provision acknowledges the practical impossibility of valuing all of the trust assets, making allocation decisions and completing the actions necessary to transfer assets to fund a non-pro rata division on the same day. However, the regulation does not require notice to the Internal Revenue Service or otherwise detail how the trustee will evidence the selection of the valuation date. Example 11 under the Final Regulations illustrates the operation of this funding provision.
The single trust (original trust) is severed on a fractional basis, such that each new trust (resulting trust) is funded with a fraction or percentage of the original trust, and the sum of those fractions or percentages is one or 100 percent, respectively. The regulation expressly authorizes the use of a formula to determine this fraction or percentage and the non-pro rata division of assets among the resulting trusts based on the fair market value of the assets on the date of severance. However, if funding on a non-pro rata basis, “each resulting trust must be funded by applying the appropriate fraction or percentage to the total fair market value of the trust assets as of the date of severance.” Example 5 under the Final Regulations illustrates the method of funding the resulting trusts that conforms to these Final Regulations as required for a qualified severance. The severance of a trust based on a pecuniary amount will not constitute a qualified severance.
The terms of the resulting trusts must provide, in the aggregate, for the “same succession of interests” of beneficiaries as are provided in the original trust. This requirement is satisfied if the beneficiaries of, and their respective beneficial interests in, the original trust remain the same after the severance in the resulting separate trusts when those resulting trusts are viewed collectively.
Thus, the terms of the trusts resulting from a qualified severance are not required to be identical, as long as the trusts collectively preserve the beneficial interests under the original single trust. However, state statutes, to the extent they address trust severances at all, typically require that resulting trusts remain governed by terms “identical” to those terms governing the original, single trust. Thus, a judicial reformation may be required to sever a trust on terms that differ from the original trust if the applicable local law and trust instrument lack express authorization for divisions resulting in trusts with different terms.
Most rulings to date applying Section 2642(a)(3), prior to the issuance of the recent Final Regulations, involve qualified severances resulting in separate trusts with terms identical to the original trust, in most cases because the taxpayers severed pursuant to a state statute or governing instrument authorizing severances on identical terms. Thus, most rulings involving qualified severances have not addressed how trusts may differ from the original trust without changing the succession of beneficial interests under the original single trust for purposes of Section 2642(a)(3). However, the Examples under new Regulation §26.2642-6(j) provide additional guidance in this respect.
Example 1 under the new qualified severance regulation parallels Example 1 under Regulation §26.2654-1(b)(1), as the latter similarly requires preservation of the same succession of beneficial interests after severance of a trust included in the transferor’s estate or created under the transferor’s will. Thus, the preamble to the regulations under Section 2654 may provide helpful guidance that similarly applies to interpretation of this requirement for qualified severances:
The Final Regulations provide that the trusts resulting from the severance of a single testamentary trust need not be identical. Thus, if the trust provides income to spouse, remainder to child and grandchild, the trust may be severed to create 2 trusts, 1 with income to spouse, remainder to child and a second with income to spouse remainder to grandchild. This result could be achieved through proper estate planning in any event. However, the regulations make it clear that the resulting trust must provide for the same succession of interests as provided for under the original trusts. Thus, a trust providing for an income interest to a child, with remainder to a grandchild, could not be divided into 1 trust for the child (equal in value to the child’s income interest) and another for the grandchild.
As indicated in the preamble to Regulation §26.2654-1, Example 3 under Regulation §26.2642-6(j) precludes the “horizontal” division of trusts based on the actuarial value of the respective beneficiaries’ temporal interests. The Final Regulations regarding qualified severances also provide several additional examples to illustrate the extent to which trusts may differ from the original trust without changing the succession of beneficial interests under the original single trust for purposes of Section 2642(a)(3).
The Final Regulations describe in particular certain severances of wholly discretionary trusts from which distributions may be made to any one or more beneficiaries on a non-pro rata basis that will satisfy this “same succession of beneficial interest” requirement if:
(i) The terms of each resulting trust are the same as the terms of the original trust, though each permissible beneficiary of the original trust is not a beneficiary of all of the resulting trusts;
(ii) Each beneficiary's interest in the resulting trusts (collectively) equals the beneficiary's interest in the original trust, determined by the terms of the trust instrument or, if none, “on a per-capita basis;”
(iii) The severance does not shift a beneficial interest in the trust to any beneficiary in a lower generation (as determined under Section 2651) than the person or persons who held the beneficial interest in the original trust; and
(iv) The severance does not extend the time for the vesting of any beneficial interest in the trust beyond the period provided for in (or applicable to) the original trust.
The regulation provides an example of a severance of a wholly discretionary trust that maintains the “same succession of beneficial interests.” A discretionary trust for the benefit of A, B, and C and their descendants with the remainder to be divided equally among those three families is severed into three separate trusts of equal value: one for the benefit A and A's descendants, one for the benefit of B and B's descendants, and one trust for the benefit of C and C's descendants. This example for severances of discretionary trusts parallels Example 5 under Regulation §26.2601-1(b)(4)(E) addressing permissible modifications of trusts grandfathered from application of the GST tax that will not subject the trusts to such tax.
This provision authorizing certain severances of discretionary trusts facilitates divisions of trusts along family lines, which are often important means of resolving family disputes. However, several aspects of this rule require additional clarification. Under the example, the meaning of “per capita” for purposes of this rule is unclear. If A, B and C described in the example are the transferor’s children, then a per capita division treats each family line equally and likely reflects the intention of most transferors or interested parties. However, if A is the transferor’s child while B and C represent the transferor’s grandchildren born to a deceased child who was A’s sibling, then the example results in the allocation to A’s trust of only one-half the amount of property allocated to the trusts held for members in A’s sibling’s family. The division of property “per capita” may significantly differ among separate family lines based on the chance order of deaths of family members and the number of children each individual chooses to have. In contrast, experience suggests that transferors and parties negotiating resolutions to disputes regarding the division of trust property typically prefer a “per stirpes” division of property that preserves the shares of property allocated to each family line, beginning with a per capita division at the children’s generation. If such per stirpes division was actually contemplated in this provision, then a technical correction might revise the reference to clarify that a per stirpes measure of the beneficiaries’ interests after the severance is appropriate.
The Final Regulations also do not express whether a severance along family lines must preserve current or remainder interests in all resulting trusts so that the members of each family line may resort to the other trusts upon exhaustion of the trust originally held for that family’s benefit. This example within Regulation §2642-6(d)(5)(ii) does not appear to require that each of A, B and C and their respective descendants maintain interests in all of the trusts resulting from the severance to the extent that any single trust is exhausted. However, Examples 2 and 7 of the Final Regulations illustrating qualified severances recite facts showing that the beneficiaries retain their interests in the remainders of both trusts resulting from the severance in the event a single trust is exhausted. However, without specific discussion, the Final Regulations remain unclear as to whether the preservation of the original beneficiaries’ interests in all of the post-severance trusts is required for a qualified severance.
In addition, the Final Regulations do not provide extensive guidance regarding the standards for the exercise of discretion that would meet the definition of a discretionary trust for purposes of this exception. Example 2 addressing this exception merely states that the trustee may distribute “as the trustee deems advisable.” Hopefully, this absolute discretion without qualification is not the only type that satisfies this exception and other discretionary standards considered similarly non-ascertainable for transfer tax purposes (i.e., “best interests and welfare,” “comfort” or “happiness”) will suffice.
In the case of a qualified severance of a trust with an inclusion ratio as defined in section 26.2642-1 of either one or 0, each trust resulting from the severance will have an inclusion ratio equal to the inclusion ratio of the original trust.
A trust with an inclusion ratio between zero and one must be severed initially into two trusts. One resulting trust must receive that fractional share of the total value of the original trust as of the date of severance equal to the applicable fraction and will have an inclusion ratio of zero. The other resulting trust must receive the remaining fractional share of the original trust and will have an inclusion ratio of one. However, if the applicable fraction of the original trust is .50, the trustee may designate which of the resulting equal trusts will have an inclusion ratio of zero and of one. The regulation confirms that each resulting trust may be further divided in additional qualified severances to create further separate trusts.
Qualified Severances of “Grandfathered” Exempt Trusts.
Section 2642(a)(3) addresses the recognition of the creation of separate trusts resulting from a qualified severance for GST tax purposes. However, the GST tax rules, including those authorizing qualified severances, do not apply at all to an “exempt trust” that is grandfathered from the imposition of GST tax. Instead, Regulation §26.2601-1(b)(4) (discussed further below in Section V.B of this outline) describes rules for determining whether a modification, judicial construction, settlement agreement, or trustee action with respect to an exempt trust will cause it to lose its exempt status. Thus, a severance of an exempt trust must satisfy those rules to avoid becoming subject to GST tax.
However, where contributions are added to a grandfathered trust after September 25, 1985, Regulation §26.2601-1(b)(1)(iv)(A) deems the trust to consist of one separate share attributable to contributions before such date that is not subject to GST tax (the “non-chapter 13 portion”) and another separate share attributable to contributions after such date that is subject to GST tax (the “chapter 13 portion”). Regulation §26.2642-6(g) confirms that any such trust may be severed into two trusts in accordance with Regulation §26.2654-1(a)(3) to segregate the non-chapter 13 portion from the chapter 13 portion, and that the trust holding the chapter 13 portion may be further divided by qualified severance.
Regulation §26.2642-6(e) details the information necessary to report a qualified severance to the IRS. The regulation does not require that a qualified severance be reported to be effective for GST purposes, though reporting is advisable to avoid future confusion when reporting subsequent GST events.
A qualified severance is reported by filing Form 706-GS(T), “Generation-Skipping Transfer Tax Return for Terminations” (or such other form as the IRS may provide for the purpose of reporting qualified severances) by the due date of the gift tax return (including extensions) for gifts made during the year in which the severance occurred, or if no gift tax return is filed, by April 15th of the year immediately following the year during which the severance occurred. Treas. Reg. §2642-6(e), (k)(2). The IRS requests that filers write the words “Qualified Severance” at the top of the return and attach a Notice of Qualified Severance including the basic information regarding the original and resulting trusts and their respective inclusion ratios itemized in the regulation. Treas. Reg. §2642-6(e).
- Recognition of Capital Gain or Loss.
Section 1001 governs the determination of the amount and recognition of capital gain or loss for income tax purposes upon the sale or other disposition of property. Effective as of August 2, 2007, Treasury Regulation Section 1.1001-1 is amended to add a helpful new subparagraph (h) describing a safe harbor for income tax purposes for certain severances of trusts, including without limitation qualified severances under Treasury Regulation Section 26.2642-6 or severances described in Treasury Regulation Section 26.2654-1(b). This new provision addresses the concern that the severance of a trust may be deemed to create a taxable exchange resulting in the recognition of capital gain by one or more of the trust beneficiaries.
The IRS addressed taxable gains resulting from the severance of a trust in PLR 9731041. PLR 9731041 describes the proposed partition of a single trust grandfathered from application of the GST tax into two separate trusts to be governed by the terms of the original trust. One resulting trust would own all of the closely held company stock and the other owning all of the remaining trust assets. Certain beneficiaries entitled to annual fixed payments from the single trust also proposed to renounce their interests in the trust holding company stock as the other resulting trust was determined to be actuarially sufficient to provide for their annual payments entirely. Due to the trustee’s power to make non-pro rata distributions under the trust instrument and local law, the IRS concluded that the partition was not a taxable event for income tax purposes. However, the IRS relied primarily upon Cottage Savings Ass’n. v. Comm’r., in its analysis of whether the partition resulted in recognition of gain or loss under Section 1001.
In Cottage Savings, the Court held that a realization event under Section 1001(a) occurs upon an exchange of properties that are “materially different.” The Court further stated that properties are “materially different” for purposes of Section 1001(a) to the extent their respective possessors enjoy legal entitlements that are different in kind or extent. Under this standard, the Court concluded that a taxpayer’s exchange of interests in groups of mortgage loans considered “substantially identical” by the regulating agency nevertheless resulted in a taxable exchange because the mortgage loans made to different obligors and secured by different homes embodied distinct legal entitlements. In PLR 9731041, the IRS applied the Cottage Savings analysis and concluded that the partition of the single trust would not change the beneficiaries’ interests. Thus, the IRS concluded that “[I]t is inconsistent with the Supreme Court’s opinion in Cottage Savings to find that the interests of the beneficiaries of the two successor trusts will not differ materially from their interests in the existing trust.”
The IRS subsequently has ruled favorably for taxpayers that severances of trusts will not result in a taxable exchange under Section 1001 after applying the Cottage Savings test. However, the IRS also has declined to rule on at least one request for a ruling on this issue, based on “the factual nature of the problem or in the interest of sound tax administration” without offering further explanation. Given the IRS’s reliance on Cottage Savings , taxpayers must analyze whether beneficiaries may obtain interests in the trust after a severance that are “materially different” from their original interests to avoid unexpected recognition of taxable gain under Section 1001. In particular, a severance that results in separate trusts governed by terms that are not identical to the original trust may warrant close scrutiny to ensure that resulting beneficial interests are not “materially different” under the Cottage Savings test -- even though the severance may retain the “same succession of interests” for GST tax purposes.
Treasury Regulation Section 1.1001-1(h) incorporates the language of the Cottage Savings test and provides that any severance of a trust will not constitute an exchange of property for other property differing materially either in kind or in extent if--
An applicable state statute or the governing instrument authorizes or directs the trustee to sever the trust; and
If the separate trusts created by the severance are funded on a non-pro rata basis (as provided in Treasury Regulation Section 26.2642-6(b)(3)), the non-pro rata funding is authorized by an applicable state statute or the governing instrument.
Treasury Regulation Section 1.1001-1(h)(1) is narrower in scope than the definition of a “qualified severance” under Code Section 2642(a)(3), which includes a severance that occurs pursuant to “any means available under” local law (not only by state statute). Accordingly, even in the absence of the specific power to sever in the trust instrument or state statute, a severance by judicial order or other means available under local law should suffice for purposes of the qualified severance statute. However, Treasury Regulation Section 1.1001-1(h)(1) requires authorization by “state statute” if the trust instrument does not expressly direct or authorize the severance. This express limitation to statutory authority potentially excludes severances that do not fit squarely within any statute but are effective under broader “state law.” For example, a court with proper equitable jurisdiction generally has the power to divide a trust by reformation. The basis for distinguishing among alternative means that are equally effective under state law for severance of a trust in the regulation is unclear, especially given the statutory direction to recognize any severance effective under local law.
The Preamble notes that “[n]o inference is to be drawn with respect to the income tax consequences under section 1001 of any severance that is not described in §1.1001-1(h)(1).” Where a severance is not described in the new safe harbor, the severance must be reviewed for the two elements of a taxable event for income tax purposes under Treasury Regulation Section 1.1001-1: whether an exchange of property has occurred, and if so, whether the exchange was “for other property differing materially either in kind or in extent.” No exchange should result from a severance pursuant to the trustee’s authority, because the trustee’s ongoing power generally prevented the beneficiaries from acquiring a fixed and identifiable interest in the trust that would be altered by the severance. The trustee’s exercise of a severance power should be treated the same as any other exercise of a trustee’s discretion, such as the discretion to make distributions. For example, a severance of a trust providing for wholly discretionary spray distributions of income and principal to beneficiaries does not create interests differing from the beneficiaries’ interests in the original trust because those were always subject to change through the exercise of the trustee’s discretion. Thus, the beneficiaries do not receive any new interest different from the original interest to which they were entitled and the severance should not incur gain or loss for income tax purposes. However, a severance that results from any means other than pursuant to the trustee’s authority must be reviewed for an exchange of property differing materially in kind or in extent.
Simultaneous with the issuance of the Final Regulations regarding qualified severances, the Treasury Department issued Proposed Regulations addressing issues that it considered as requiring further consideration. Notice of Proposed Rulemaking REG-128843-05.
The most significant change under the Proposed Regulations is the recognition of all severances effective under state law for GST tax purposes. Proposed Regulation § 26.2642-6(h) clarifies that separate trusts created in a non-qualified severance (other than a severance described in Regulation §26.2654-1) that are treated as separate under applicable state law will be respected as separate after the date of the severance for all GST tax purposes. However, the inclusion ratio of the resulting trusts will be the same as the inclusion ratio of the original trust immediately before the severance. Thus, the non-qualified severance of a trust with an inclusion ratio between zero and one will not produce separate trusts with the most efficient inclusion ratios of zero and one. However, the proposed regulation confirms that the post-severance recognition of the separate resulting trusts means that the allocation of GST exemption, making of various GST tax elections and occurrence of generation-skipping transfers from one of such trusts will not impact any other such trust for GST tax purposes. Such recognition of non-qualified severances would increase the alternatives for taxpayers to remedy or improve the configuration of trusts creating adverse GST tax consequences. If Treasury ultimately adopts the position recognizing the separate trusts resulting from non-qualified severances , compliance with the requirements for a “qualified severance” will be unnecessary in cases where a change in the inclusion ratio from the original trust is unnecessary.
Proposed Regulation §26.2642-6(d)(4) introduces a new rule providing that if a severance is funded on a non-pro rata basis, each asset is valued solely for funding purposes by multiplying the fair market value of the asset held in the original trust as of the date of severance by the fractional or percentage interest in that asset being distributed to that resulting trust. “Thus, the assets must be valued without taking into account any discount or premium arising from the severance, for example, any valuation discounts that might arise because the resulting trust receives less than the entire interest held by the original trust.” Id. However, it is unclear that any basis for this addition exists in the language of Section 2642(a)(3) or its legislative history. Moreover, this regulation will be internally inconsistent to the extent it requires funding at fair market value but denies legitimate discounts or premiums in the valuation of trust assets pursuant to applicable state law. The trustee also may breach its fiduciary duty by complying with this proposed regulation, to the extent compliance results in an allocation different from the allocation that would result from funding based on the fair market values determined under state law.
Proposed Regulation §26.2642-6(d)(7)(ii) also clarifies that a qualified severance of a trust with an inclusion ratio between zero and one may create multiple trusts. Section 2642(a)(3) states that a trust with an inclusion ratio between zero and one must be severed into two trusts, indicating that the statute did not contemplate a severance resulting in multiple trusts and requiring a series of severances to create multiple trusts. However, Section 2642(a)(3)(B)(iii) gives the Treasury the ability to broaden the definition of a qualified severance by providing that “[t]he term ‘qualified severance’ includes any other severance permitted under regulations prescribed by the Secretary.” Under this delegation of authority, the Proposed Regulation provides that a qualified severance of a trust with an inclusion ratio between zero and one may create more than two resulting trusts if one or more resulting trusts in the aggregate receive that fractional share of the value of the original trust as of the date of severance equal to the applicable fraction of the original trust. The trust or trusts receiving such share will have an inclusion ratio of 0, and each of the other resulting trust or trusts will have an inclusion ratio of one. If two or more of the resulting trusts receives a fractional share of the value of the original trust equal to the applicable fraction, the trustee may designate which of those resulting trusts will have an inclusion ratio of 0 or of one.
Julie K. Kwon is a partner in the law firm of McDermott Will & Emery LLP based in the Firm’s Chicago office. As a member of the Private Client Department, she advises clients on a variety of matters, including estate, gift and generation skipping transfer tax issues, trust and estate administration, contested trust and tax matters, and construction and reformation of wills and trusts.
She chairs the Estate & Gift Tax Committee of the Section
P.L. 107-16, 107 th Cong., 1 st Sess. (June 7, 2001).
See Treas. reg. §26.2654-1(a)(3), including Example 8.
Transfers from a trust with an inclusion ratio of 0 are not subject to GST tax, whereas transfers from a trust with an inclusion ratio of one are fully subject to GST tax.
Section 2642(a)(3) permits the issuance of regulations describing severances in addition to those described in the statute that will be treated as “qualified severances.”
In contrast, Regulation §26.2654-1(b)(1) recognize some severances of trusts included in a transferor’s taxable gross estate as “retroactive” to the date of death, even if the severance is not complete at the time of death or the due date of the federal estate tax return.
SeePLRs 200713002, 200713001, 200502036, 200451021, 200441022, 200429004, 200408014, 200403072, 200519008, 200508001, 200502036, 200451029, 200451021, 200441022, 200352011, 200351010, 200340015, 200223016, 200213014. In numerous instances, a trust for which the qualified terminable interest property (“QTIP”) election under Section 2056(b)(7) was made is severed on identical terms because the severance is required solely to facilitate an effective reverse QTIP election under Section 2652(a)(3). See200540007, 200519008, 200508001, 200451029, 200443025, 200441022.
Example 1 of Regulation §26.2642-6(j) addressing qualified severances parallels the following Example 1 of Regulation §26.2654-1(b)(1), in each case illustrating a trust severance that preserves the succession of beneficial interests in the original trust:
Example 1. Severance of single trust. T's will establishes a testamentary trust providing that income is to be paid to T's spouse for life. At the spouse's death, one-half of the corpus is to be paid to T's child, C, or C's estate (if C fails to survive the spouse) and one-half of the corpus is to be paid to T's grandchild, GC, or GC's estate (if GC fails to survive the spouse). If the requirements of paragraph [Regulation §26.2654-1](b) of this Section are otherwise satisfied, T's executor may divide the testamentary trust equally into two separate trusts, one trust providing an income interest to spouse for life with remainder to C, and the other trust with an income interest to spouse for life with remainder to GC. Furthermore, if the requirements of paragraph [Regulation §26.2654-1](b) of this Section are satisfied, the executor or trustee may further divide the trust for the benefit of GC. GST exemption may be allocated to any of the divided trusts.
Regulation §26.2601-1(b)(4) defines “exempt trust” as a trust that is not subject to GST tax due to the application of Regulation §26.2601-1(b)(1) to (3).
The notice should identify: the severed trust, the name of the transferor, date of creation, tax identification number, the inclusion ratio of the trust before severance, each of the trusts resulting from the severance, the date of the severance, the fraction of the total assets of the original trust funding each resulting trust and other details explaining the basis for funding the resulting trusts, the inclusion ratio of each resulting trust.
499 U.S. 554 (1991).
Id. at 560-61.
Id. at 564-65.
PLR 200010037 (trustee had discretionary power to divide trust and IRS concluded trustee’s division of trust was not an exchange and no gain realization). Similarly, in PLRs 200116016 and 200210056 trustee’s power in trust instrument to divide trusts and the subsequent division of trust was not an exchange and no gain realization. In PLR 200128035, the IRS determined the beneficiaries interests in proposed trusts resulting from a division of a trust were not materially different from their interests in the original trust, and, therefore, no gain realization.
For a detailed discussion of Cottage Savings and its application to planning with trusts for GST tax purposes, see Lloyd Leva Plaine, “How Cottage Savings and Recognition of Gain Relate to Trusts,” 38th Annual Heckerling Institute on Estate Planning, Chapter 4 (2004).
The Proposed Regulations continue to deny the recognition of separate shares of a single trust that are not actually severed into separate trusts. See Proposed Regulation 26.2654-1(a)(1)(i). However, the rationale for treating separate shares differently from separate trusts for GST tax purposes is unclear and consistent treatment for both separate types of interests would seem appropriate.