GST Inclusion Ratios and Applicable Fractions for Estate Planners: Rules, Exceptions and Tax Calculations

Critical to successful multi-generational gift tax planning and compliance is a solid foundation in the GST tax regime of Section 2632 and following statutes. Beyond identifying skip-person transferees and gifts that will trigger GST tax, estate planners must have a detailed understanding of the “inclusion ratio” rules to calculate the tax cost of GSTs.

Section 2642 provides the framework for determining the taxable portion of any GST under GST tax. The inclusion ratio works with the “applicable fraction” to determine the tax rate of a GST. A trust with an inclusion ratio of 0 is exempt from GST tax, while a trust with a ratio of 1 is fully taxable.

The taxable portion of the trust is the applicable fraction to determine the property subject to the GST tax rules. The applicable fraction consists of the GST tax exemption over the property value, net of estate tax paid and any charitable deduction.

The inclusion ratio and applicable fraction formulas are used differently depending on the type of trust receiving a GST. There are special rules applicable to charitable lead annuity trusts, for example, that alter the tax cost of a GST. To avoid costly tax consequences, estate planning counsel and advisers need to be constantly aware of the impact of inclusion ratio rules on transfers subject to the GST rules.

Listen as our experienced panel provides a deep and practical guide to the calculations of inclusion ratios and applicable fractions under Section 2642.

1. IRC 2642 structure
   1. Inclusion ratio defined
   2. Applicable fraction defined
   3. Treatment of inclusion ratios in severance of GST-impacted trust into two or more trusts
   4. Special rules for Charitable Lead Annuity Trusts
2. Calculation of inclusion ratio
3. Computation of applicable fraction
4. Planning implication of pre-transfer inclusion ratio and fraction calculations
5. Situations and subsequent transfers requiring recomputation of inclusion ratio and applicable fraction

The panel will discuss these and other important topics:

• How to spot trusts with an inclusion ratio greater than zero
• Proactively identifying valuation opportunities when calculating inclusion ratios
• The inter-relation between inclusion ratio and applicable fraction under Section 2642 and its regulations
• Special rules for CLATs and other types of trusts in calculation of inclusion ratio and imposition of GST tax
• Regulatory guidance for calculating numerator and denominator of applicable fractions

Learning Objectives

After completing this course, you will be able to:

• Discern the factors needed to calculate the numerator and denominator of the GST applicable fraction
• Determine how to compute the inclusion ratio for a GST trust
• Recognize exceptions for CLATs and other specific trusts to the inclusion ratio computation rules
• Identify planning opportunities through pre-transfer inclusion ratio calculations in structuring and funding trusts subject to GST tax

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience at mid-level within the organization preparing complex tax forms and schedules. Specific knowledge of estate and gift tax rules and reporting; basic familiarity with exemption calculations, generation skipping taxes and portability of spousal lifetime exclusions.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).