[Congressional Record Volume 145, Number 165 (Friday, November 19, 1999)]
[Senate]
[Pages S15090-S15092]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. MACK (for himself and Mr. Breaux):
  S. 1975. A bill to amend the Internal Revenue Code of 1986 to modify 
the tax on generation-skipping transfers to eliminate certain traps for 
the unwary and otherwise improve the fairness of such tax; to the 
Committee on Finance.
  There being no objection, the bill was ordered to be printed in the 
Record as follows:


          The Generation-Skipping Transfer Tax Amendments Act

  Mr. MACK: Mr. President, today Senator Breaux and I join in 
introducing legislation to correct serious problems in the allocation 
of generation-skipping transfer tax (GST) exemptions. This legislation 
would provide relief to taxpayers for missed allocations of the GST 
exemption and would make the exemption allocation automatic, in place 
of the current law requirement that the taxpayers take an affirmative 
step to claim the exemption. This proposed change was included in the 
Taxpayer Refund and Relief Act of 1999, but failed to become law due to 
the President's veto of that bill.
  Under this legislation, the GST exemption is automatically allocated 
to ``indirect skip'' transfers made while the donor is alive. An 
indirect skip is a transfer of property subject to the gift tax that is 
made to a GST trust. Direct skips (generally, transfers solely for the 
benefit of grandchildren) are already covered by an automatic 
allocation rule. An individual may elect not to have the automatic 
allocation rule apply to an indirect skip. Also, under this 
legislation, the GST exemption may be allocated retroactively when 
there is an unnatural order of death. If a lineal descendant of the 
transferor predeceased the transferor, then the transferor may allocate 
the unused GST exemption to any previous transfer or transfers to the 
trust on a chronological basis.
  This legislation also provides authorization and direction to the 
Treasury Secretary to grant extensions of time to make the election to 
allocate the GST exemption and to grant exceptions to the time 
requirement. If such relief is granted, then the value on the date of 
transfer to the trust would be used for determining GST exemption 
allocation.
  Mr. President, this is important legislation which deserves enactment 
at the earliest possible date. I ask unanimous consent that the text of 
the bill be printed in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 1975

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Generation-Skipping Transfer 
     Tax Amendments Act of 1999''.

     SEC. 2. DEEMED ALLOCATION OF GST EXEMPTION TO LIFETIME 
                   TRANSFERS TO TRUSTS; RETROACTIVE ALLOCATIONS.

       (a) In General.--Section 2632 of the Internal Revenue Code 
     of 1986 (relating to special rules for allocation of GST 
     exemption) is amended by redesignating subsection (c) as 
     subsection (e) and by inserting after subsection (b) the 
     following new subsections:
       ``(c) Deemed Allocation to Certain Lifetime Transfers to 
     GST Trusts.--
       ``(1) In general.--If any individual makes an indirect skip 
     during such individual's lifetime, any unused portion of such 
     individual's GST exemption shall be allocated to the property 
     transferred to the extent necessary to make the inclusion 
     ratio for such property zero. If the amount of the indirect 
     skip exceeds such unused portion, the entire unused portion 
     shall be allocated to the property transferred.
       ``(2) Unused portion.--For purposes of paragraph (1), the 
     unused portion of an individual's GST exemption is that 
     portion of such exemption which has not previously been--
       ``(A) allocated by such individual,
       ``(B) treated as allocated under subsection (b) with 
     respect to a direct skip occurring during or before the 
     calendar year in which the indirect skip is made, or
       ``(C) treated as allocated under paragraph (1) with respect 
     to a prior indirect skip.
       ``(3) Definitions.--
       ``(A) Indirect skip.--For purposes of this subsection, the 
     term `indirect skip' means any transfer of property subject 
     to the tax imposed by chapter 12 made to a GST trust.
       ``(B) GST trust.--The term `GST trust' means a trust that 
     could have a generation-skipping transfer with respect to the 
     transferor unless--
       ``(i) the trust instrument provides that more than 25 
     percent of the trust corpus must be distributed to or may be 
     withdrawn by 1 or more individuals who are non-skip persons--

       ``(I) before the date that the individual attains age 46,
       ``(II) on or before 1 or more dates specified in the trust 
     instrument that will occur before the date that such 
     individual attains age 46, or
       ``(III) upon the occurrence of an event that, in accordance 
     with regulations prescribed by the Secretary, may reasonably 
     be expected to occur before the date that such individual 
     attains age 46;

       ``(ii) the trust instrument provides that more than 25 
     percent of the trust corpus must be distributed to or may be 
     withdrawn by 1 or more individuals who are non-skip persons 
     and who are living on the date of death of another person 
     identified in the instrument (by name or by class) who is 
     more than 10 years older than such individuals;
       ``(iii) the trust instrument provides that, if 1 or more 
     individuals who are non-skip persons die on or before a date 
     or event described in clause (i) or (ii), more than 25 
     percent of the trust corpus either must be distributed to the 
     estate or estates of 1 or more of such individuals or is 
     subject to a general power of appointment exercisable by 1 or 
     more of such individuals;
       ``(iv) the trust is a trust any portion of which would be 
     included in the gross estate of a non-skip person (other than 
     the transferor) if such person died immediately after the 
     transfer;
       ``(v) the trust is a charitable lead annuity trust (within 
     the meaning of section 2642(e)(3)(A)) or a charitable 
     remainder annuity trust or a charitable remainder unitrust 
     (within the meaning of section 664(d)); or
       ``(vi) the trust is a trust with respect to which a 
     deduction was allowed under section 2522 for the amount of an 
     interest in the form of the right to receive annual payments 
     of a fixed percentage of the net fair market value of the 
     trust property (determined yearly) and which is required to 
     pay principal to a non-skip person if such person is alive 
     when the yearly payments for which the deduction was allowed 
     terminate.
     For purposes of this subparagraph, the value of transferred 
     property shall not be considered to be includible in the 
     gross estate of a non-skip person or subject to a right of 
     withdrawal by reason of such person holding a right to 
     withdraw so much of such property as does not exceed the 
     amount referred to in

[[Page S15091]]

     section 2503(b) with respect to any transferor, and it shall 
     be assumed that powers of appointment held by non-skip 
     persons will not be exercised.
       ``(4) Automatic allocations to certain gst trusts.--For 
     purposes of this subsection, an indirect skip to which 
     section 2642(f) applies shall be deemed to have been made 
     only at the close of the estate tax inclusion period. The 
     fair market value of such transfer shall be the fair market 
     value of the trust property at the close of the estate tax 
     inclusion period.
       ``(5) Applicability and effect.--
       ``(A) In general.--An individual--
       ``(i) may elect to have this subsection not apply to--

       ``(I) an indirect skip, or
       ``(II) any or all transfers made by such individual to a 
     particular trust, and

       ``(ii) may elect to treat any trust as a GST trust for 
     purposes of this subsection with respect to any or all 
     transfers made by such individual to such trust.
       ``(B) Elections.--
       ``(i) Elections with respect to indirect skips.--An 
     election under subparagraph (A)(i)(I) shall be deemed to be 
     timely if filed on a timely filed gift tax return for the 
     calendar year in which the transfer was made or deemed to 
     have been made pursuant to paragraph (4) or on such later 
     date or dates as may be prescribed by the Secretary.
       ``(ii) Other elections.--An election under clause (i)(II) 
     or (ii) of subparagraph (A) may be made on a timely filed 
     gift tax return for the calendar year for which the election 
     is to become effective.
       ``(d) Retroactive Allocations.--
       ``(1) In general.--If--
       ``(A) a non-skip person has an interest or a future 
     interest in a trust to which any transfer has been made,
       ``(B) such person--
       ``(i) is a lineal descendant of a grandparent of the 
     transferor or of a grandparent of the transferor's spouse or 
     former spouse, and
       ``(ii) is assigned to a generation below the generation 
     assignment of the transferor, and
       ``(C) such person predeceases the transferor,
     then the transferor may make an allocation of any of such 
     transferor's unused GST exemption to any previous transfer or 
     transfers to the trust on a chronological basis.
       ``(2) Special rules.--If the allocation under paragraph (1) 
     by the transferor is made on a gift tax return filed on or 
     before the date prescribed by section 6075(b) for gifts made 
     within the calendar year within which the non-skip person's 
     death occurred--
       ``(A) the value of such transfer or transfers for purposes 
     of section 2642(a) shall be determined as if such allocation 
     had been made on a timely filed gift tax return for each 
     calendar year within which each transfer was made,
       ``(B) such allocation shall be effective immediately before 
     such death, and
       ``(C) the amount of the transferor's unused GST exemption 
     available to be allocated shall be determined immediately 
     before such death.
       ``(3) Future interest.--For purposes of this subsection, a 
     person has a future interest in a trust if the trust may 
     permit income or corpus to be paid to such person on a date 
     or dates in the future.''.
       (b) Conforming Amendment.--Paragraph (2) of section 2632(b) 
     of such Code is amended by striking ``with respect to a 
     direct skip'' and inserting ``or subsection (c)(1)''.
       (c) Effective Dates.--
       (1) Deemed allocation.--Section 2632(c) of the Internal 
     Revenue Code of 1986 (as added by subsection (a)), and the 
     amendment made by subsection (b), shall apply to transfers 
     subject to chapter 11 or 12 of such Code made after December 
     31, 1999, and to estate tax inclusion periods ending after 
     December 31, 1999.
       (2) Retroactive allocations.--Section 2632(d) of the 
     Internal Revenue Code of 1986 (as added by subsection (a)) 
     shall apply to deaths of non-skip persons occurring after the 
     date of the enactment of this Act.

     SEC. 3. SEVERING OF TRUSTS.

       (a) In General.--Subsection (a) of section 2642 of the 
     Internal Revenue Code of 1986 (relating to inclusion ratio) 
     is amended by adding at the end the following new paragraph:
       ``(3) Severing of trusts.--
       ``(A) In general.--If a trust is severed in a qualified 
     severance, the trusts resulting from such severance shall be 
     treated as separate trusts thereafter for purposes of this 
     chapter.
       ``(B) Qualified severance.--For purposes of subparagraph 
     (A)--
       ``(i) In general.--The term `qualified severance' means the 
     division of a single trust and the creation (by any means 
     available under the governing instrument or under local law) 
     of 2 or more trusts if--

       ``(I) the single trust was divided on a fractional basis, 
     and
       ``(II) the terms of the new trusts, in the aggregate, 
     provide for the same succession of interests of beneficiaries 
     as are provided in the original trust.

       ``(ii) Trusts with inclusion ratio greater than zero.--If a 
     trust has an inclusion ratio of greater than zero and less 
     than 1, a severance is a qualified severance only if the 
     single trust is divided into 2 trusts, one of which receives 
     a fractional share of the total value of all trust assets 
     equal to the applicable fraction of the single trust 
     immediately before the severance. In such case, the trust 
     receiving such fractional share shall have an inclusion ratio 
     of zero and the other trust shall have an inclusion ratio of 
     1.
       ``(iii) Regulations.--The term `qualified severance' 
     includes any other severance permitted under regulations 
     prescribed by the Secretary.
       ``(C) Timing and manner of severances.--A severance 
     pursuant to this paragraph may be made at any time. The 
     Secretary shall prescribe by forms or regulations the manner 
     in which the qualified severance shall be reported to the 
     Secretary.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to severances after the date of the enactment of 
     this Act.

     SEC. 4. MODIFICATION OF CERTAIN VALUATION RULES.

       (a) Gifts for Which Gift Tax Return Filed or Deemed 
     Allocation Made.--Paragraph (1) of section 2642(b) of the 
     Internal Revenue Code of 1986 (relating to valuation rules, 
     etc.) is amended to read as follows:
       ``(1) Gifts for which gift tax return filed or deemed 
     allocation made.--If the allocation of the GST exemption to 
     any transfers of property is made on a gift tax return filed 
     on or before the date prescribed by section 6075(b) for such 
     transfer or is deemed to be made under section 2632 (b)(1) or 
     (c)(1)--
       ``(A) the value of such property for purposes of subsection 
     (a) shall be its value as finally determined for purposes of 
     chapter 12 (within the meaning of section 2001(f)(2)), or, in 
     the case of an allocation deemed to have been made at the 
     close of an estate tax inclusion period, its value at the 
     time of the close of the estate tax inclusion period, and
       ``(B) such allocation shall be effective on and after the 
     date of such transfer, or, in the case of an allocation 
     deemed to have been made at the close of an estate tax 
     inclusion period, on and after the close of such estate tax 
     inclusion period.''.
       (b) Transfers at Death.--Subparagraph (A) of section 
     2642(b)(2) of such Code is amended to read as follows:
       ``(A) Transfers at death.--If property is transferred as a 
     result of the death of the transferor, the value of such 
     property for purposes of subsection (a) shall be its value as 
     finally determined for purposes of chapter 11; except that, 
     if the requirements prescribed by the Secretary respecting 
     allocation of post-death changes in value are not met, the 
     value of such property shall be determined as of the time of 
     the distribution concerned.''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect as if included in the amendments made by 
     section 1431 of the Tax Reform Act of 1986.

     SEC. 5. RELIEF PROVISIONS.

       (a) In General.--Section 2642 of the Internal Revenue Code 
     of 1986 is amended by adding at the end the following new 
     subsection:
       ``(g) Relief Provisions.--
       ``(1) Relief for late elections.--
       ``(A) In general.--The Secretary shall by regulation 
     prescribe such circumstances and procedures under which 
     extensions of time will be granted to make--
       ``(i) an allocation of GST exemption described in paragraph 
     (1) or (2) of subsection (b), and
       ``(ii) an election under subsection (b)(3) or (c)(5) of 
     section 2632.
     Such regulations shall include procedures for requesting 
     comparable relief with respect to transfers made before the 
     date of enactment of this paragraph.
       ``(B) Basis for determinations.--In determining whether to 
     grant relief under this paragraph, the Secretary shall take 
     into account all relevant circumstances, including evidence 
     of intent contained in the trust instrument or instrument of 
     transfer and such other factors as the Secretary deems 
     relevant. For purposes of determining whether to grant relief 
     under this paragraph, the time for making the allocation (or 
     election) shall be treated as if not expressly prescribed by 
     statute.
       ``(2) Substantial compliance.--An allocation of GST 
     exemption under section 2632 that demonstrates an intent to 
     have a zero inclusion ratio with respect to a transfer or a 
     trust shall be deemed to be an allocation of so much of the 
     transferor's unused GST exemption as produces, to the extent 
     possible, a zero inclusion ratio. In determining whether 
     there has been substantial compliance, all relevant 
     circumstances shall be taken into account, including evidence 
     of intent contained in the trust instrument or instrument of 
     transfer and such other factors as the Secretary deems 
     relevant.''.
       (b) Effective Dates.--
       (1) Relief for late elections.--Section 2642(g)(1) of the 
     Internal Revenue Code of 1986 (as added by subsection (a)) 
     shall apply to requests pending on, or filed after, the date 
     of the enactment of this Act.
       (2) Substantial compliance.--Section 2642(g)(2) of such 
     Code (as so added) shall take effect on the date of the 
     enactment of this Act and shall apply to allocations made 
     prior to such date for purposes of determining the tax 
     consequences of generation-skipping transfers with respect to 
     which the period of time for filing claims for refund has not 
     expired. No negative implication is intended with respect to 
     the availability of relief for late elections or the 
     application of a rule of substantial compliance prior to the 
     enactment of this amendment.
 Mr. BREAUX. Mr. President, I am pleased to join my colleague 
from the Senate Finance Committee, Senator Mack, in introducing 
legislation designated to address past problems with

[[Page S15092]]

the allocation of the generation-skipping transfer (GST) exemption, and 
to provide for automatic allocations going forward.
  Under current law, taxpayers must make affirmative allocations of the 
GST exemption for transfers to a trust. As a result, many taxpayers 
have not made timely allocations and face the prospect of losing a 
significant portion of the exemption's benefit. This legislation is 
designed to assure that taxpayers get the full benefit of the law by 
making GST exemption allocations automatic for transfers to a trust and 
to give taxpayers the opportunity to cure past allocations which were 
not made on a timely basis.
  This legislation was included in the tax bill that was sent to the 
President earlier this summer. It enjoys Republican and Democratic 
support on both sides of the hill. I urge its inclusion in the next tax 
bill sent to the White House.
                                 ______