[Federal Register Volume 69, Number 171 (Friday, September 3, 2004)]
[Proposed Rules]
[Pages 53862-53866]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-20165]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 26

[REG-145988-03]
RIN 1545-BC60


Predeceased Parent Rule

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations relating to the 
predeceased parent rule, which provides an exception to the general 
rules of section 2651 of the Internal Revenue Code (Code) for 
determining the generation assignment of a transferee of property for 
generation-skipping transfer (GST) tax purposes. These proposed 
regulations also provide rules regarding a transferee assigned to more 
than one generation. The proposed regulations reflect changes to the 
law made by the Taxpayer Relief Act of 1997 and generally apply to 
individuals, trusts, and estates. This document also provides notice of 
a public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by December 2, 
2004. Requests to speak and outlines of topics to be discussed at the 
public hearing scheduled for December 14, 2004, at 10 a.m., must be 
received by November 23, 2004.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-145988-03), room 5203, 
Internal Revenue Service, P.O.B. 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
145988-03), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically, via the IRS 
Internet site at: http://www.irs.gov/regs or via the Federal 
eRulemaking portal at http://www.regulations.gov (IRS and REG-145988-
03). The public hearing will be held in the IRS Auditorium, Internal 
Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Lian A. Mito at (202) 622-7830; concerning submissions of comments, the 
hearing and/or to be placed on the building access list to attend the 
hearing, Guy R. Traynor, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed regulations under sections 2651(e) 
and (f)(1) of the Internal Revenue Code (Code). Section 2651(e) was 
added to the Code by section 511(a) of the Taxpayer Relief Act of 1997 
(Public Law 105-34; 111 Stat. 778; 1997-4 C.B. 1, vol. 1) (the 1997 
Act) and expands the predeceased parent exception from GST tax 
previously contained in former section 2612(c)(2).
    Under chapter 13 of the Code, a GST tax is imposed on all 
transfers, whether made directly or indirectly, to skip persons. 
Generally, a skip person is a person who is two or more generations 
below the generation of the transferor, or a trust if all of the 
interests are held by skip persons. The transferor is the individual 
who transferred property in a transaction subject to the gift or estate 
tax. Transfers that are subject to the GST tax are direct skips, 
taxable terminations, and taxable distributions. A direct skip is a 
transfer subject to gift or estate tax of an interest in property to a 
skip person. A taxable termination is the termination by death, lapse 
of time, release of power, or otherwise, of an interest in property 
held in a trust unless, immediately after the termination, a non-skip 
person has an interest in the property or at no time after the 
termination may a distribution be made from the trust to a skip person. 
A taxable distribution is any distribution (other than a direct skip or 
taxable termination) from a trust to a skip person.
    For transfers before 1998, former section 2612(c)(2) provided an 
exception to the general rule that a transfer, either outright or in 
trust, to a grandchild of the transferor was a direct skip. Under 
former section 2612(c)(2), if a parent of the transferor's grandchild 
was a lineal descendant of the transferor and that parent was deceased 
at the time of the transfer, the grandchild was treated as the child of 
the transferor for purposes of determining whether a transfer was a 
direct skip. This rule also applied to a transfer made to a grandchild 
of the transferor's spouse or former spouse if a parent of the 
grandchild was a lineal descendant of the transferor's spouse or former 
spouse and that parent was deceased at the time of the transfer.
    Former section 2612(c)(2) further provided that, if a transferor's 
grandchild was treated as the transferor's child, the lineal 
descendants of that grandchild also moved up one generation level. 
Furthermore, if any transfer of property to a trust would be a direct 
skip but for the application of the exception, any generation 
assignment determined under this exception also applied for purposes of 
applying chapter 13 of the Code to transfers from the portion of the 
trust attributable to the property. Therefore, a subsequent 
distribution of property from a trust to a grandchild treated as a 
child of the transferor was not treated as a taxable distribution.
    Section 511(a) of the 1997 Act repealed former section 2612(c)(2) 
and replaced it with new subsection (e) of section 2651, which contains 
the rules for assigning individuals to generations for purposes of the 
GST tax. Section 2651(e) broadens the predeceased parent rule by 
expanding its application to: (1) Transfers that would be taxable 
distributions or taxable terminations; and (2) transfers to collateral 
heirs (lineal descendants of the transferor's parents, or the parents 
of the transferor's spouse or former spouse), provided that the 
transferor (or the transferor's spouse or former spouse) has no living 
lineal descendants at the time of the transfer. Section 2651(e) applies 
to terminations, distributions, and transfers occurring after December 
31, 1997.
    Section 2651(e) applies if an individual is a descendant of a 
parent of the transferor (or the transferor's spouse or former spouse) 
and if the individual's parent, who also is a lineal descendant of the 
parent of the transferor (or the transferor's spouse or former spouse), 
died prior to the time the transferor is subject to estate or gift tax 
on the transfer from which an interest of that individual is 
established or derived. If these criteria are satisfied, then the 
individual is treated under section 2651(e) as if the individual is a 
member of the generation that is one generation below the lower of 
either the transferor's generation or the generation of the 
individual's youngest living lineal ancestor who is also a descendant 
of the parent of the transferor (or the transferor's spouse or former 
spouse). Section 2651(e) does not apply, however, to a transfer to an 
individual who is not a lineal descendant of the transferor (or the 
transferor's spouse or former spouse) if, at the time of the transfer, 
the transferor (or the transferor's spouse or former spouse, if

[[Page 53863]]

applicable) has any living lineal descendant.

Explanation of Provisions

Predeceased Parent Rule

    The proposed regulations provide rules and examples regarding the 
predeceased parent rule of section 2651(e). One issue addressed in 
these proposed regulations is the time when an interest is established 
or derived. The proposed regulations provide that, for purposes of 
section 2651(e), an individual's interest in property or a trust is 
established or derived at the time the transferor is subject to 
transfer tax under chapter 11 or 12 of the Code. If a transferor is 
subject to transfer tax under chapter 11 or 12 of the Code on the 
property transferred on more than one occasion, then the individual's 
interest will be considered established or derived on the earliest of 
those occasions.
    However, the proposed regulations provide an exception to this 
general rule for remainder interests in trusts for which an election 
under section 2056(b)(7) (QTIP election) has been made to treat all or 
part of the trust as qualified terminable interest property (QTIP). 
Specifically, to the extent of the QTIP election, the remainder 
beneficiary's interest will be deemed to have been established or 
derived on the death of the transferor's spouse (the income 
beneficiary), rather than on the transferor's earlier death. Absent 
this exception, a remainder beneficiary of a QTIP trust would not 
benefit from the predeceased parent rule if the remainder beneficiary's 
parent is alive when the QTIP trust is established, but is deceased 
when the income beneficiary's interest terminates. Without this 
exception, the rule under section 2651(e) would be more restrictive 
than the previous rule under former section 2612(c)(2) which, by 
referring to the transfer from the transferor (i.e., the surviving 
spouse, in the case of a QTIP trust), would have made the predeceased 
parent rule available to the remainder beneficiary. The rule under 
section 2651(e), however, does not apply to any trust for which the 
election under section 2652(a)(3) (reverse QTIP) is made. If a reverse 
QTIP election is made, the grantor remains the transferor of the trust 
for purposes of chapter 13 of the Code. In most cases in which the 
reverse QTIP election has been made for a trust, the transferor's GST 
exemption has been allocated to the trust. Thus, the trust will be 
exempt from GST tax.
    Solely for purposes of section 2651(e), these proposed regulations 
limit the term ancestor to a lineal ancestor. No inference should be 
drawn with respect to the definition of ancestor for purposes of any 
other section of the Code.

Individuals Assigned to More Than One Generation

    Under section 2651(f)(1), an individual who would be assigned to 
more than one generation is assigned to the youngest of those 
generations. This rule prevents the avoidance of the GST tax through 
adoption or marriage. Thus, for example, a transferor cannot avoid GST 
tax by adopting the transferor's adult grandchild. The Treasury 
Department and IRS believe, however, that it is reasonable to presume 
that tax avoidance is not a primary motive when a transferor adopts a 
descendant of a parent of the transferor (or the transferor's spouse or 
former spouse) who is a minor. Thus, under the proposed regulations, if 
an adoptive parent legally adopts an individual who is: (1) A 
descendant of a parent of the adoptive parent (or the adoptive parent's 
spouse or former spouse); and (2) under the age of 18 at the time of 
the adoption, then the adopted individual will be treated as a member 
of the generation that is one generation below the adoptive parent for 
purposes of determining whether a transfer from the adoptive parent (or 
the spouse or former spouse of the adoptive parent, or a lineal 
descendant of a grandparent of the adoptive parent) to the adopted 
individual is subject to GST tax.
    In addition, the proposed regulations provide that if an 
individual's generation assignment is adjusted with regard to a 
transfer under either section 2651(e) or as a result of an adoption 
described above, a corresponding adjustment with respect to that 
transfer is made to the generation assignment of that individual's 
spouse or former spouse, that individual's descendants, and the spouse 
or former spouse of each of that individual's descendants.

Special Analyses

    It has been determined that these proposed regulations are not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations and because these 
regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Therefore, a Regulatory Flexibility Analysis is not required. 
Pursuant to section 7805(f) of the Code, these regulations will be 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and Treasury Department also request comments on the 
clarity of the proposed rules and how they can be made easier to 
understand. All comments will be available for public inspection and 
copying.
    A public hearing has been scheduled for December 14, 2004, 
beginning at 10 a.m., in the Auditorium of the Internal Revenue 
Building, 1111 Constitution Avenue, NW., Washington, DC. Due to 
building security procedures, visitors must enter at the Constitution 
Avenue entrance. In addition, all visitors must present photo 
identification to enter the building. Because of access restrictions, 
visitors will not be admitted beyond the immediate entrance area more 
than 30 minutes before the hearing starts. For information about having 
your name placed on the building access list to attend the hearing, see 
the FOR FURTHER INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit electronic or 
written comments and an outline of the topics to be discussed and the 
time to be devoted to each topic (signed original and eight (8) copies) 
by December 2, 2004. A period of 10 minutes will be allotted to each 
person for making comments. An agenda showing the scheduling of the 
speakers will be prepared after the deadline for receiving outlines has 
passed. Copies of the agenda will be available free of charge at the 
hearing.

Drafting Information

    The principal author of these proposed regulations is Lian A. Mito 
of the Office of Associate Chief Counsel (Passthroughs and Special 
Industries). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 26

    Estate taxes, Reporting and recordkeeping requirements.

[[Page 53864]]

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 26 is proposed to be amended as follows:

PART 26--GENERATION-SKIPPING TRANSFER TAX REGULATIONS UNDER THE TAX 
REFORM ACT OF 1986

    Paragraph 1. The authority citation for part 26 continues to read, 
in part, as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. In Sec.  26.2600-1, the table is amended by:
    1. Removing the entries for Sec.  26.2612-1, paragraphs (a)(1) and 
(a)(2).
    2. Adding entries for Sec. Sec.  26.2651-1, 26.2651-2, and 26.2651-
3.
    The additions read as follows:


Sec.  26.2600-1  Table of contents

* * * * *

Sec.  26.2612-1 Definitions.

Sec.  26.2651-1 Generation assignment.

    (a) Special rule for persons with a deceased parent.
    (1) In general.
    (2) Special rules.
    (3) Established or derived.
    (4) Special rule in the case of additional contributions to a 
trust.
    (b) Limited application to collateral heirs.
    (c) Examples.

Sec.  26.2651-2 Individual assigned to more than one generation

    (a) In general.
    (b) Exception.
    (c) Special rules.
    (1) Corresponding generation adjustment.
    (2) Continued application of generation assignment.

Sec.  26.2651-3 Effective dates

    (a) In general.
    (b) Transition rule.

    Par. 3. Section 26.2612-1 is amended by:
    1. Removing the paragraph designation and heading for (a)(1).
    2. Removing paragraph (a)(2).
    3. Removing the second sentence of paragraph (f).
    4. Removing Examples 6 and 7 in paragraph (f).
    5. Redesignating Examples 8 through 15 as Examples 6 through 13 in 
paragraph (f).
    6. Revising the first sentence of newly designated Example 7 in 
paragraph (f).
    7. Revising the first sentence of newly designated Example 11 in 
paragraph (f).
    The revisions read as follows:


Sec.  26.2612-1  Definitions.

    (a) * * *
* * * * *
    (f) * * *

    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. * * *
* * * * *
    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. * * *
* * * * *
    Par. 4. Sections 26.2651-1, 26.2651-2 and 26.2651-3 are added to 
read as follows:


Sec.  26.2651-1  Generation assignment.

    (a) Special rule for persons with a deceased parent--(1) In 
general. This paragraph (a) applies for purposes of determining whether 
a transfer to or for the benefit of an individual who is a descendant 
of a parent of the transferor (or the transferor's spouse or former 
spouse) is a generation-skipping transfer. If that individual's parent, 
who is a lineal descendant of the parent of the transferor (or the 
transferor's spouse or former spouse), is deceased at the time the 
transfer (from which an interest of such individual is established or 
derived) is subject to the tax imposed by chapter 11 or 12 of the 
Internal Revenue Code on the transferor, the individual is treated as 
if that individual were a member of the generation that is one 
generation below the lower of--
    (i) The transferor's generation; or
    (ii) The generation assignment of the individual's youngest living 
lineal ancestor who is also a descendant of the parent of the 
transferor (or the transferor's spouse or former spouse).
    (2) Special rules--(i) Corresponding generation adjustment. If an 
individual's generation assignment is adjusted with respect to a 
transfer in accordance with paragraph (a)(1) of this section, a 
corresponding adjustment with respect to that transfer is made to the 
generation assignment of each--
    (A) Spouse or former spouse of that individual;
    (B) Descendant of that individual; and
    (C) Spouse or former spouse of each descendant of that individual.
    (ii) Continued application of generation assignment. If a transfer 
to a trust would be a generation-skipping transfer but for paragraph 
(a)(1) of this section, any generation assignment determined under this 
paragraph (a) continues to apply in determining whether any subsequent 
distribution from (or termination of an interest in) the portion of the 
trust attributable to that transfer is a generation-skipping transfer.
    (iii) Ninety-day rule. For purposes of paragraph (a)(1) of this 
section, any individual who dies no later than 90 days after a transfer 
is treated as having predeceased the transferor.
    (iv) Local law. Except as provided in paragraph (a)(2)(iii) of this 
section, a living descendant is not treated as having predeceased the 
transferor solely by reason of a provision of applicable local law; 
e.g., an individual who disclaims is not treated as a predeceased 
parent solely because state law treats a disclaimant as having 
predeceased the transferor for purposes of determining the disposition 
of the disclaimed property.
    (3) Established or derived. For purposes of section 2651(e) and 
paragraph (a)(1) of this section, an individual's interest is 
established or derived at the time the transferor who transferred the 
property that makes up the interest is subject to transfer tax imposed 
by either chapter 11 or 12 of the Internal Revenue Code on the property 
transferred. If the transferor will be subject to transfer tax imposed 
by either chapter 11 or 12 of the Internal Revenue Code on the property 
transferred on more than one occasion, then the relevant time for 
determining whether paragraph (a)(1) of this section applies is the 
earliest time at which the transferor is subject to the tax imposed by 
either chapter 11 or 12 of the Internal Revenue Code. However, for 
purposes of section 2651(e) and paragraph (a)(1) of this section, the 
interest of a remainder beneficiary in a trust for which an election 
under section 2056(b)(7) (QTIP election) has been made will be deemed 
to have been established or derived, to the extent of the QTIP 
election, on the death of the transferor's spouse (the income 
beneficiary). The preceding sentence does not apply to a trust for 
which the election under section 2652(a)(3) (reverse QTIP election) is 
made.
    (4) Special rule in the case of additional contributions to a 
trust. If a transferor referred to in paragraph (a)(1) of this section 
contributes additional property to a trust that existed before the 
application of paragraph (a)(1), then the additional property is 
treated as being held in a separate trust for purposes of chapter 13 of 
the Internal Revenue Code. The provisions of Sec.  26.2654-1(a)(2) 
apply as if the portions of the single trust had had separate 
transferors. Other subsequent contributions are treated as 
contributions to the appropriate portion of the single trust.

[[Page 53865]]

    (b) Limited application to collateral heirs. Paragraph (a) of this 
section does not apply in the case of a transfer to any individual who 
is not a lineal descendant of the transferor (or of the transferor's 
spouse or former spouse) if the transferor (or the transferor's spouse 
or former spouse) has any living lineal descendant at the time of the 
transfer.
    (c) Examples. The following examples illustrate the provisions of 
this section:

    Example 1. T establishes an irrevocable trust, Trust, providing 
that trust income is to be paid to T's grandchild, GC, for 5 years. 
At the end of the 5-year period or on GC's prior death, Trust is to 
terminate and the principal is to be distributed to GC if GC is 
living or to GC's children if GC has died. The transfer that 
occurred on the creation of the trust is subject to the tax imposed 
by chapter 12 of the Internal Revenue Code and, at the time of the 
transfer, T's child, C, who is a parent of GC, is deceased. GC is 
treated as a member of the generation that is one generation below 
T's generation. As a result, GC is not a skip person and Trust is 
not a skip person. Therefore, the transfer to Trust is not a direct 
skip. Similarly, distributions to GC during the term of Trust and at 
the termination of Trust will not be GSTs.
    Example 2. On January 1, 2004, T transfers $100,000 to an inter 
vivos trust that provides T with an annuity payable for four years 
or until T's prior death. The annuity satisfies the definition of a 
qualified interest under section 2702(b). When the trust terminates, 
the corpus is to be paid to T's grandchild, GC. The transfer is 
subject to the tax imposed by chapter 12 of the Internal Revenue 
Code and, at the time of the transfer, T's child, C, who is a parent 
of GC, is living. C dies in 2006. In this case, C was alive at the 
time the transfer by T is subject to the tax imposed by chapter 12 
of the Internal Revenue Code. Therefore, section 2651(e) and 
paragraph (a)(1) of this section do not apply. When the trust 
subsequently terminates, the distribution to GC is a taxable 
termination.
    Example 3. T dies testate in 2002, survived by T's spouse, S, 
their children, C1 and C2, and C1's child, GC. Under the terms of 
T's will, a trust is established for the benefit of S and their 
descendants. Under the terms of the trust, all income is payable to 
S during S's lifetime and the trustee may distribute trust corpus 
for S's health, support and maintenance. At S's death, the corpus is 
to be distributed, outright, to C1 and C2. If either C1 or C2 has 
predeceased S, the deceased child's share of the corpus is to be 
distributed to that child's descendants, per stirpes. The executor 
of T's estate makes the election under section 2056(b)(7) to treat 
the trust property as qualified terminable interest property (QTIP) 
but does not make the election under section 2652(a)(3) (reverse 
QTIP election). In 2003, C1 dies survived by S and GC. In 2004, S 
dies, and the trust terminates. The full fair market value of the 
trust is includible in S's gross estate under section 2044 and S 
becomes the transferor of the trust under section 2652(a)(1)(A). 
Under the rule in paragraph (a)(3) of this section, GC's interest is 
considered established or derived at S's death, and because C1 is 
deceased at that time, GC is treated as a member of the generation 
that is one generation below the generation of the transferor, S. As 
a result, GC is not a skip person and the transfer to GC is not a 
direct skip.
    Example 4. The facts are the same as in Example 3. However, the 
executor of T's estate makes the election under section 2652(a)(3) 
(reverse QTIP election) for the entire trust. Therefore, T remains 
the transferor because, for purposes of chapter 13 of the Internal 
Revenue Code, the election to be treated as qualified terminable 
interest property is treated as if it had not been made. In this 
case, the rule in paragraph (a)(3) of this section does not apply, 
so GC's interest is established or derived on T's death in 2002. 
Because C1 was living at the time of T's death, the predeceased 
parent rule under section 2651(e) does not apply, even though C1 was 
deceased at the time the transfer from S to GC is subject to the tax 
under chapter 11 of the Internal Revenue Code. When the trust 
terminates, the distribution to GC is a taxable termination that is 
subject to the GST tax to the extent the trust has an inclusion 
ratio greater than zero. See section 2642(a).
    Example 5. T establishes an irrevocable trust providing that 
trust income is to be paid to T's grandniece, GN, for 5 years or 
until GN's prior death. At the end of the 5-year period or on GN's 
prior death, the trust is to terminate and the principal is to be 
distributed to GN if living, or if GN has died, to GN's descendants, 
per stirpes. S is a sibling of T and the parent of N. N is the 
parent of GN. At the time of the transfer, T has no living lineal 
descendant, S is living, N is deceased, and the transfer is subject 
to the gift tax imposed by chapter 12 of the Internal Revenue Code. 
GN is treated as a member of the generation that is one generation 
below T's generation because S, GN's youngest living lineal ancestor 
who is also a descendant of T's parent, is in T's generation. As a 
result, GN is not a skip person and the transfer to the trust is not 
a direct skip. In addition, distributions to GN during the term of 
the trust and at the termination of the trust will not be GSTs.
    Example 6. On January 1, 2004, T transfers $50,000 to the great 
grandchild, GGC, of B, a brother of T. At the time of the transfer, 
B's grandchild, GC, who is a parent of GGC and a child of B's living 
child, C, is deceased. GGC will be treated as a member of the 
generation that is one generation below the lower of T's generation 
or the generation assignment of GGC's youngest living lineal 
ancestor who is also a descendant of the parent of the transferor. 
In this case, C is GGC's youngest living lineal ancestor who is also 
a descendant of the parent of T. Because C's generation assignment 
is lower than T's generation, GGC will be treated as a member of the 
generation that is one generation below C's generation assignment 
(i.e., GGC will be treated as a member of GC's generation). As a 
result, GGC remains a skip person and the transfer to GGC is a 
direct skip.


Sec.  26.2651-2  Individual assigned to more than 1 generation.

    (a) In general. Except as provided in paragraphs (b) or (c) of this 
section, an individual who would be assigned to more than 1 generation 
is assigned to the youngest of the generations to which that individual 
would be assigned.
    (b) Exception. An adopted individual will be treated as a member of 
the generation that is one generation below the adoptive parent for 
purposes of determining whether a transfer to the adopted individual 
from the adoptive parent (or the spouse or former spouse of the 
adoptive parent, or a lineal descendant of a grandparent of the 
adoptive parent) is subject to chapter 13 of the Internal Revenue Code. 
For purposes of this paragraph (b), an adopted individual is an 
individual who is--
    (1) A descendant of a parent of the adoptive parent (or the spouse 
or former spouse of the adoptive parent); and
    (2) Under the age of 18 at the time of the adoption.
    (c) Special rules--(1) Corresponding generation adjustment. If an 
individual's generation assignment is adjusted with respect to a 
transfer in accordance with paragraph (b) of this section, a 
corresponding adjustment with respect to that transfer is made to the 
generation assignment of each--
    (i) Spouse or former spouse of that individual;
    (ii) Descendant of that individual; and
    (iii) Spouse or former spouse of each descendant of that 
individual.
    (2) Continued application of generation assignment. If a transfer 
to a trust would be a generation-skipping transfer but for paragraph 
(b) of this section, any generation assignment determined under 
paragraph (b) of this section continues to apply in determining whether 
any subsequent distribution from (or termination of an interest in) the 
portion of the trust attributable to that transfer is a generation-
skipping transfer.


Sec.  26.2651-3  Effective dates.

    (a) In general. The rules of Sec. Sec.  26.2651-1 and 26.2651-2 are 
applicable for terminations, distributions, and transfers occurring on 
or after the date these regulations are issued as final regulations in 
the Federal Register.
    (b) Transition rule. (1) The rule contained in the last two 
sentences of Sec.  26.2651-1(a)(3) is applicable for terminations, 
distributions, and transfers occurring on or after the date these 
regulations are issued as final regulations in the Federal Register.
    (2) Except as provided in paragraph (b)(1) of this section, in the 
case of transfers occurring after December 31, 1997, and before the 
date that this document is published in the Federal

[[Page 53866]]

Register as a final regulation, taxpayers may rely on any reasonable 
interpretation of section 2651(e). For this purpose, these proposed 
regulations are treated as a reasonable interpretation of the statute.

Deborah M. Nolan,
Acting Deputy Commissioner for Services and Enforcement.
[FR Doc. 04-20165 Filed 9-2-04; 8:45 am]
BILLING CODE 4830-01-P