2022 Trust Forum Presentations

WHY IN A PERFECT WORLD SHOULD IR BE 0 OR 1? • Distributions from trusts with IR = 1 should be made to children – no GST tax as not a generation-skipping event – the child is not a “skip person.” • Distributions from trusts with IR = 0 should be preserved, to the greatest extent possible, for grandchildren or more remote generations – otherwise, a distribution to a child “wastes” the GST exemption. • If a trust has a “mixed” IR, then distributions to children waste some GST exemption, and distributions to grandchildren or more remote generations requires payment of some GST.

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WHAT SHOULD A TRUSTEE SUGGEST IF THEY ARE ADMINISTERING A TRUST WITH A MIXED INCLUSION RATIO? 1. If Settlor is alive and has more GST exemption, have Settlor allocate enough GST exemption to the trust to get the IR = 0. The GST exemption grows with inflation. Next year, the inflation adjustment will provide $860,000 more GST exemption to everyone; most settlors have more GST exemption to use in cleaning up mixed inclusion ratios. 2. Divide the mixed inclusion ratio trust into two trusts – one with an IR = 0 and the other with an IR = 1. Then, distribute to children from IR = 1 trust and to grandchildren or more remote issue from trust with IR = 0. (This is called a “qualified severance” and is permitted under Treasury Regulations.)

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