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The generation-skipping tax (GST) regulations published in December 1995, which finalized and modified proposed regulations issued several years earlier, gave important guidance on separate share treatment and the severance of a single trust.
Regulations provide that, if a single trust consists solely of substantially separate and independent shares for different beneficiaries, the share attributable to each beneficiary (or group of beneficiaries) is treated as a separate trust for purposes of the GST.1 Further, if there is more than one transferor with respect to a trust, the portions of the trust attributable to the different transferors are treated as separate trusts for purposes of the GST.2
Any trust treated as a separate trust as explained in the previous paragraph may be divided or severed into separate trusts to reflect this treatment.3
The severance of a trust that is included in the transferor's gross estate (or created under the transferor's will) into two or more trusts is recognized for the GST, provided the:
(1) trust is severed pursuant to a direction in the governing instrument, or
(2) trust is severed pursuant to discretionary authority granted either under the governing instrument or local law, and
(a) terms of each trust provide for the same succession of interests and beneficiaries as provided in the original trust, and
(b) severance occurs (or a reformation proceeding, if required, is commenced) prior to the date prescribed for filing the federal estate tax return (including extensions actually granted) for the estate of the transferor, and either
(i) new trusts are severed on a fractional basis or
(ii) if severance is...