1. The objective is to fracture out skip beneficiary shares from non-skip beneficiary shares, for which no GST exemption is necessary.
2. To that end, it is critical under IRC section 2654(b) to properly separate these trust components. There are two alternatives, as follows:
A. IRC section 2654(b)(2) provides under Reg. 26.2654-1(a) that "substantially separate and independent shares" shall have the meaning under Reg. 1.663(c)-3 relating to income tax separation. Thus, if the trust instrument provides for separately distinguishable shares, then those shares can be fractured off into separate trusts for GST purposes.
B. The Trust must be severed under local law in accordance with Reg.
26.2654-1(a)(3) and Reg. 26.2654-1(b), which will also requires that a
probate petition be filed with form 706, and the petition must be filed
the day before the due date of the form 706.
1. Credit shelter portion (retroactive to QTIP election)
2. Division of remainder, after estate tax and as of the second death, into the applicable separate shares. The apportionment of the decedent's estate tax out of the trust before funding is important to reduce use of GST election.
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