(a) Direct skip. A direct skip is a transfer to a skip person that is subject to Federal estate or gift tax. If property is transferred to a trust, the transfer is a direct skip only if the trust is a skip person. Only one direct skip occurs when a single transfer of property skips two or more generations. See paragraph (d) of this section for the definition of skip person. See § 26.2652-1(b) for the definition of trust. See § 26.2632-1(c)(4) for the time that a direct skip occurs if the transferred property is subject to an estate tax inclusion period.

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(b) Taxable termination—(1) In general. Except as otherwise provided in this paragraph (b), a taxable termination is a termination (occurring for any reason) of an interest in trust unless—

(i) A transfer subject to Federal estate or gift tax occurs with respect to the property held in the trust at the time of the termination;

(ii) Immediately after the termination, a person who is not a skip person has an interest in the trust; or

(iii) At no time after the termination may a distribution, other than a distribution the probability of which occurring is so remote as to be negligible (including a distribution at the termination of the trust) be made from the trust to a skip person. For this purpose, the probability that a distribution will occur is so remote as to be negligible only if it can be ascertained by actuarial standards that there is less than a 5 percent probability that the distribution will occur.

(2) Partial termination. If a distribution of a portion of trust property is made to a skip person by reason of a termination occurring on the death of a lineal descendant of the transferor, the termination is a taxable termination with respect to the distributed property.

(3) Simultaneous terminations. A simultaneous termination of two or more interests creates only one taxable termination.

(c) Taxable distribution—(1) In general. A taxable distribution is a distribution of income or principal from a trust to a skip person unless the distribution is a taxable termination or a direct skip. If any portion of GST tax (including penalties and interest thereon) imposed on a distributee is paid from the distributing trust, the payment is an additional taxable distribution to the distributee. For purposes of chapter 13, the additional distribution is treated as having been made on the last day of the calendar year in which the original taxable distribution is made. If Federal estate or gift tax is imposed on any individual with respect to an interest in property held by a trust, the interest in property is treated as having been distributed to the individual to the extent that the value of the interest is subject to Federal estate or gift tax. See § 26.2652-1(a)(6) Example 5, regarding the treatment of the lapse of a power of appointment as a transfer to a trust.

(2) Look-through rule not to apply. Solely for purposes of determining whether any transfer from a trust to another trust is a taxable distribution, the rules of section 2651(e)(2) do not apply. If the transferring trust and the recipient trust have the same transferor, see § 26.2642-4(a) (1) and (2) for rules for recomputing the applicable fraction of the recipient trust.

(d) Skip person. A skip person is—

(1) An individual assigned to a generation more than one generation below that of the transferor (determined under the rules of section 2651); or

(2) A trust if—

(i) All interests in the trust are held by skip persons; or

(ii) No person holds an interest in the trust and no distributions, other than a distribution the probability of which occurring is so remote as to be negligible (including distributions at the termination of the trust), may be made after the transfer to a person other than a skip person. For this purpose, the probability that a distribution will occur is so remote as to be negligible only if it can be ascertained by actuarial standards that there is less than a 5 percent probability that the distribution will occur.

(e) Interest in trust—(1) In general. An interest in trust is an interest in property held in trust as defined in section 2652(c) and these regulations. An interest in trust exists if a person—

(i) Has a present right to receive trust principal or income;

(ii) Is a permissible current recipient of trust principal or income and is not described in section 2055(a); or

(iii) Is described in section 2055(a) and the trust is a charitable remainder annuity trust or unitrust (as defined in section 664(d)) or a pooled income fund (as defined in section 642(c)(5)).

(2) Exceptions—(i) Support obligations. In general, an individual has a present right to receive trust income or principal if trust income or principal may be used to satisfy the individual’s support obligations. However, an individual does not have an interest in a trust merely because a support obligation of that individual may be satisfied by a distribution that is either within the discretion of a fiduciary or pursuant to provisions of local law substantially equivalent to the Uniform Gifts (Transfers) to Minors Act.

(ii) Certain interests disregarded. An interest which is used primarily to postpone or avoid the GST tax is disregarded for purposes of chapter 13. An interest is considered as used primarily to postpone or avoid the GST tax if a significant purpose for the creation of the interest is to postpone or avoid the tax.

(3) Disclaimers. An interest does not exist to the extent it is disclaimed pursuant to a disclaimer that constitutes a qualified disclaimer under section 2518.

(f) Examples. The following examples illustrate the provisions of this section.

Example 1. Direct skip,T gratuitously conveys Blackacre to T’s grandchild. Because the transfer is a transfer to a skip person of property subject to Federal gift tax, it is a direct skip.Example 2. Direct skip of more than one generation,T gratuitously conveys Blackacre to T’s great-grandchild. The transfer is a direct skip. Only one GST tax is imposed on the direct skip although two generations are skipped by the transfer.Example 3. Withdrawal power in trust,T transfers $50,000 to a new trust providing that trust income is to be paid to T’s child, C, for life and, on C’s death, the trust principal is to be paid to T’s descendants. Under the terms of the trust, T grants four grandchildren the right to withdraw $10,000 from the trust for a 60 day period following the transfer. Since C, who is not a skip person, has an interest in the trust, the trust is not a skip person. T’s transfer to the trust is not a direct skip.Example 4. Taxable termination,T establishes an irrevocable trust under which the income is to be paid to T’s child, C, for life. On the death of C, the trust principal is to be paid to T’s grandchild, GC. Since C has an interest in the trust, the trust is not a skip person and the transfer to the trust is not a direct skip. If C dies survived by GC, a taxable termination occurs at C’s death because C’s interest in the trust terminates and thereafter the trust property is held by a skip person who occupies a lower generation than C.Example 5. Direct skip of property held in trust,T establishes a testamentary trust under which the income is to be paid to T’s surviving spouse, S, for life and the remainder is to be paid to a grandchild of T and S. T’s executor elects to treat the trust as qualified terminable interest property under section 2056(b)(7). The transfer to the trust is not a direct skip because S, a person who is not a skip person, holds a present right to receive income from the trust. Upon S’s death, the trust property is included in S’s gross estate under section 2044 and passes directly to a skip person. The GST occurring at that time is a direct skip because it is a transfer subject to chapter 11. The fact that the interest created by T is terminated at S’s death is immaterial because S becomes the transferor at the time of the transfer subject to chapter 11.Example 6. Taxable termination,T establishes an irrevocable trust for the benefit of T’s child, C, T’s grandchild, GC, and T’s great-grandchild, GGC. Under the terms of the trust, income and principal may be distributed to any or all of the living beneficiaries at the discretion of the trustee. Upon the death of the second beneficiary to die, the trust principal is to be paid to the survivor. C dies first. A taxable termination occurs at that time because, immediately after C’s interest terminates, all interests in the trust are held by skip persons (GC and GGC).Example 7. Taxable termination resulting from distribution,The facts are the same as in Example 6, except twenty years after C’s death the trustee exercises its discretionary power and distributes the entire principal to GGC. The distribution results in a taxable termination because GC’s interest in the trust terminates as a result of the distribution of the entire trust property to GGC, a skip person. The result would be the same if the trustee retained sufficient funds to pay the GST tax due by reason of the taxable termination, as well as any expenses of winding up the trust.Example 8. Simultaneous termination of interests of more than one beneficiary,T establishes an irrevocable trust for the benefit of T’s child, C, T’s grandchild, GC, and T’s great-grandchild, GGC. Under the terms of the trust, income and principal may be distributed to any or all of the living beneficiaries at the discretion of the trustee. Upon the death of C, the trust property is to be distributed to GGC if then living. If C is survived by both GC and GGC, both C’s and GC’s interests in the trust will terminate on C’s death. However, because both interests will terminate at the same time and as a result of one event, only one taxable termination occurs.Example 9. Partial taxable termination,T creates an irrevocable trust providing that trust income is to be paid to T’s children, A and B, in such proportions as the trustee determines for their joint lives. On the death of the first child to die, one-half of the trust principal is to be paid to T’s then living grandchildren. The balance of the trust principal is to be paid to T’s grandchildren on the death of the survivor of A and B. If A predeceases B, the distribution occurring on the termination of A’s interest in the trust is a taxable termination and not a taxable distribution. It is a taxable termination because the distribution is a distribution of a portion of the trust that occurs as a result of the death of A, a lineal descendant of T. It is immaterial that a portion of the trust continues and that B, a person other than a skip person, thereafter holds an interest in the trust.Example 10. Taxable distribution,T establishes an irrevocable trust under which the trust income is payable to T’s child, C, for life. When T’s grandchild, GC, attains 35 years of age, GC is to receive one-half of the principal. The remaining one-half of the principal is to be distributed to GC on C’s death. Assume that C survives until GC attains age 35. When the trustee distributes one-half of the principal to GC on GC’s 35th birthday, the distribution is a taxable distribution because it is a distribution to a skip person and is neither a taxable termination nor a direct skip.Example 11. Exercise of withdrawal right as taxable distribution,The facts are the same as in Example 10, except GC holds a continuing right to withdraw trust principal and after one year GC withdraws $10,000. The withdrawal by GC is not a taxable termination because the withdrawal does not terminate C’s interest in the trust. The withdrawal by GC is a taxable distribution to GC.Example 12. Interest in trust,T establishes an irrevocable trust under which the income is to be paid to T’s child, C, for life. On the death of C, the trust principal is to be paid to T’s grandchild, GC. Because C has a present right to receive income from the trust, C has an interest in the trust. Because GC cannot currently receive distributions from the trust, GC does not have an interest in the trust.Example 13. Support obligation,T establishes an irrevocable trust for the benefit of T’s grandchild, GC. The trustee has discretion to distribute property for GC’s support without regard to the duty or ability of GC’s parent, C, to support GC. Because GC is a permissible current recipient of trust property, GC has an interest in the trust. C does not have an interest in the trust because the potential use of the trust property to satisfy C’s support obligation is within the discretion of a fiduciary. C would be treated as having an interest in the trust if the trustee was required to distribute trust property for GC’s support.[T.D. 8644, 60 FR 66903, Dec. 27, 1995; 61 FR 29653, June 12, 1996, as amended by T.D. 9214, 70 FR 41141, July 18, 2005]