[Federal Register Volume 70, Number 136 (Monday, July 18, 2005)]
[Rules and Regulations]
[Pages 41140-41144]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-13799]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 26

[TD 9214]
RIN 1545-BC60


Predeceased Parent Rule

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final 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 regulations also 
provide rules regarding a transferee assigned to more than one 
generation. The regulations reflect changes to the law made by the 
Taxpayer Relief Act of 1997 and generally apply to individuals, trusts, 
and estates.

DATES: Effective Date: These regulations are effective July 18, 2005.

FOR FURTHER INFORMATION CONTACT: Lian A. Mito at (202) 622-7830 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    On September 3, 2004, a notice of proposed rulemaking (REG-145988-
03) relating to the predeceased parent rule was published in the 
Federal Register (69 FR 53862). The public hearing scheduled for 
December 14, 2004, was cancelled because no requests to speak were 
received. Written comments responding to the notice of proposed 
rulemaking were received. After consideration of all the comments, the 
proposed regulations are adopted as amended by this Treasury decision. 
The revisions are discussed below.

Summary of Comments

    The proposed regulations provided that, for purposes of determining 
whether the predeceased parent rule applies, an individual transferee's 
interest in property is established or derived at the time the 
transferor who transferred the property is subject to either the gift 
or estate tax on the property. If the transferor will be subject to a 
transfer tax imposed on the property transferred on more than one 
occasion, then the relevant time for determining whether the 
predeceased parent rule applies is the earliest time at which the 
transferor is subject to the gift or estate tax. In the case of a trust 
for which an election under section 2056(b)(7) (QTIP election) has been 
made, the proposed regulations provided that the interest of the 
remainder beneficiary is considered as established or derived when the 
QTIP trust was established. However, the proposed regulations also 
included an exception to this general rule by providing that, to the 
extent of the QTIP (but not a reverse QTIP) election, the remainder 
beneficiary's interest is 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.
    One commentator indicated that this exception is unnecessary. The 
commentator believes that the proposed regulations misinterpreted the 
statute because a remainder beneficiary's interest in a trust that is 
subject to a QTIP (but not a reverse QTIP) election should always be 
deemed to have been established, not at the time of the trust's 
creation, but rather at the time when the income-beneficiary spouse is 
first subject to gift or estate tax on the trust property. This 
position applies the definition of ``transferor'' in section 2652 in 
the context of the reference to ``established and derived'' in section 
2651(e), and is based on the conclusion that the tax in this situation 
is not imposed on the same transferor on more than one occasion. Thus, 
because the donee or surviving spouse becomes the transferor of a trust 
that is subject to a QTIP (but not reverse QTIP) election, the 
remainder beneficiary's interest in such a trust is established upon 
that spouse's gift of an interest in the trust or that spouse's death, 
in each case the time at which gift or estate tax on the trust is first 
imposed on that spouse. Viewed from this perspective, this provision of 
the proposed regulations is not an exception. The Treasury Department 
and the IRS agree, and the final regulations adopt the suggested 
change.
    Under the proposed regulations, the predeceased parent rule does 
not apply to transfers to collateral heirs if, at the time of the 
transfer, ``the transferor (or the transferor's spouse or former 
spouse) has any living lineal descendant.'' Thus, under the proposed 
regulations, if, at the time of the transfer, the transferor has no 
living lineal descendants but the transferor's spouse or former spouse 
does, the predeceased parent rule will not apply to any transfer by the 
transferor to a collateral heir. A number of commentators pointed out 
that the parenthetical language is inconsistent with the purpose and 
language of the statute, and will inappropriately narrow the 
application of the predeceased parent rule with respect to collateral 
heirs. The Treasury Department and the IRS agree, and the parenthetical 
language is removed in the final regulations. Accordingly, the final 
regulations require that, for the predeceased parent rule to apply to 
transfers to collateral heirs, only the transferor must have no living 
lineal descendants at the time of the transfer.
    The proposed regulations provided an exception to the general rule 
that assigns an individual to the youngest of the generations to which 
that individual may be assigned. Under the 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 the 
GST tax. The proposed regulations defined an ``adopted individual'' as 
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.
    Two commentators expressed concern that this objective test 
(specifically, the age at the time of the adoption) provides a strong 
inducement to engage in a tax-motivated adoption, particularly in the 
case of older minors, because of the amount of GST tax that thereby may 
be avoided. One commentator suggested lowering the limit on the age of 
the individual at the time of the adoption for purposes of the test. 
The other commentator recommended adding a third element to the 
definition of adopted individual, namely, that the individual was not 
adopted primarily for tax-avoidance purposes.

[[Page 41141]]

    The Treasury Department and the IRS continue to believe that 
certain adopted minors should be treated as a member of the generation 
that is one generation below the adoptive parent, but only if the 
adoption is not primarily for the purpose of avoiding GST tax. 
Therefore, under the final regulations, 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 transfers from 
certain individuals to the adopted individual are subject to GST tax if 
the following requirements are satisfied: (1) The individual is legally 
adopted by the adoptive parent; (2) the individual is a descendant of a 
parent of the adoptive parent (or the adoptive parent's spouse or 
former spouse); (3) the individual is under the age of 18 at the time 
of the adoption; and (4) the individual is not adopted primarily for 
GST tax-avoidance purposes. The determination of whether an adoption is 
primarily for GST tax-avoidance purposes is to be made based upon all 
of the facts and circumstances. The Treasury Department and IRS believe 
that the most significant factor to be considered is whether there is a 
bona fide parent/child relationship between the adoptive parent and the 
adopted individual. Other factors that may be considered include (but 
are not limited to): the age of the adopted individual at the time of 
the adoption, and the relationship between the adopted individual and 
the individual's parents immediately before the adoption. Thus, the 
adoption of an infant will be less likely to be considered primarily 
for tax-avoidance purposes than the adoption of an individual who is 
age 17. Objective evidence that the parent was unwilling or unable to 
act as the individual's parent (e.g., the parent abandons the 
individual, or is adjudicated incompetent or incapacitated) may 
indicate that an adoption is not primarily for tax-avoidance purposes.
    One commentator suggested clarifying the interaction between 
section 2651(b)(3), regarding the treatment of legal adoptions, and 
section 2651(f)(1), regarding individuals assigned to more than one 
generation. In order to provide that clarification, the Treasury 
Department and the IRS confirm that, for purposes of chapter 13, a 
legal adoption may create an additional generation assignment, but the 
adoption does not constitute a substitute for the blood relationship. 
Specifically, an individual who has been adopted will be treated as a 
blood relative of the adoptive parent under section 2651(b)(3) and 
generally is treated as a child of the adoptive parent under state law. 
In spite of the adoption, however, the adopted individual also 
continues to be a blood relative of the individual's birth parents. 
Thus, the generation assignment of the adopted individual with regard 
to a transfer from an ancestor of the birth parent, for example, will 
continue to be measured under section 2651(b), but, subject to the 
exception in Sec.  26.2651-2(b), the relationship between them may be 
subject to the special rule in section 2651(f)(1), which provides that 
an individual who would be assigned to more than one generation is 
assigned to the youngest of those generations.
    The proposed regulations provided that any individual who dies no 
later than 90 days after a transfer is treated as having predeceased 
the transferor. One commentator recommended that the final regulations 
apply this 90-day rule to inter vivos, as well as testamentary, 
transfers. The 90-day rule is intended to replace a similar 90-day rule 
in Sec.  26.2612-1(a)(2), which is limited to testamentary transfers. 
Moreover, many state statutes contain similar rules that apply only to 
testamentary transfers. Accordingly, the final regulations do not adopt 
this recommendation, and revise the language of this provision to 
confirm that it addresses only transfers occurring by reason of the 
death of the transferor.
    Two commentators requested confirmation that the reference to 
adoption in Sec.  26.2651-2(b) applies solely for purposes of the rule 
in section 2651(f)(1) and has no application to the rule in section 
2651(b). Accordingly, the introductory language of Sec.  26.2651-2(b) 
has been revised.

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. Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking preceding these regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on their impact on small entities.

Drafting Information

    The principal author of these 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.

Amendments to the Regulations

0
Accordingly, 26 CFR part 26 is amended as follows:

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

0
Paragraph 1. The authority citation for part 26 continues to read, in 
part, as follows:

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


0
Par. 2. In Sec.  26.2600-1, the table is amended by:
0
1. Removing the entries for Sec.  26.2612-1, paragraphs (a)(1) and 
(a)(2).
0
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.  26.2651-1  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.
    (a) Limited application to collateral heirs.
    (b) 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.
    (d) Example.


Sec.  26.2651-3  Effective dates.

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


0
Par. 3. Section 26.2612-1 is amended by:
0
1. Removing the paragraph designation and heading for (a)(1).
0
2. Removing paragraph (a)(2).
0
3. Removing the second sentence of paragraph (f) introductory text.
0
4. Removing Examples 6 and 7 in paragraph (f).
0
5. Redesignating Examples 8 through 15 as Examples 6 through 13 in 
paragraph (f).

[[Page 41142]]

0
6. Revising the first sentence of newly designated Example 7 in 
paragraph (f).
0
7. Revising the first sentence of newly designated Example 11 in 
paragraph (f).
    The revisions read as follows:


Sec.  26.2612-1  Definitions.

* * * * *
    (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. * * *
* * * * *

0
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 on the transferor by chapter 11 
or 12 of the Internal Revenue Code, 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 
occurring by reason of the death of the transferor is treated as having 
predeceased the transferor.
    (iv) Local law. A living person 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 is subject to 
transfer tax on the property. See Sec.  26.2652-1(a) for the definition 
of a transferor. If the same transferor, on more than one occasion, is 
subject to transfer tax imposed by either chapter 11 or 12 of the 
Internal Revenue Code on the property so transferred (whether the same 
property, reinvestments thereof, income thereon, or any or all of 
these), 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. For purposes of section 2651(e) and paragraph (a)(1) of 
this section, the interest of a remainder beneficiary of a trust for 
which an election under section 2523(f) or 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 date as of which 
the value of the trust corpus is first subject to tax under section 
2519 or section 2044. The preceding sentence does not apply to a trust, 
however, to the extent that an election under section 2652(a)(3) 
(reverse QTIP election) has been made for the trust because, to the 
extent of a reverse QTIP election, the spouse who established the trust 
will remain the transferor of the trust for generation-skipping 
transfer tax purposes.
    (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), 
regarding treatment as separate trusts, apply as if different 
transferors had contributed to the separate portions of the single 
trust. Additional subsequent contributions from that transferor will be 
added to the new share that is treated as a separate trust.
    (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 the transferor's 
spouse or former spouse) if the transferor 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 
irrevocable 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 was 
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 that is subject to the 
GST tax to the extent the trust has an inclusion ratio greater than 
zero. See section 2642(a).
    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 of T and 
S's 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

[[Page 41143]]

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 then-living 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). 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, 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 was 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 then-living 
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 a great-
grandniece, GGN, who is the great-grandchild of B, a brother of T. 
At the time of the transfer, T has no living lineal descendants and 
B's grandchild, GN, who is a parent of GGN and a child of B's living 
child, N, is deceased. GGN 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 GGN's youngest living lineal 
ancestor who is also a descendant of the parent of the transferor. 
In this case, N is GGN's youngest living lineal ancestor who is also 
a descendant of the parent of T. Because N's generation assignment 
is lower than T's generation, GGN will be treated as a member of the 
generation that is one generation below N's generation assignment 
(i.e., GGN will be treated as a member of her parent's generation). 
As a result, GGN remains a skip person and the transfer to GGN is a 
direct skip.
    Example 7. T has a child, C. C and C's spouse, S, have a 20-
year-old child, GC. C dies and S subsequently marries S2. S2 legally 
adopts GC. T transfers $100,000 to GC. Under section 2651(b)(1), GC 
is assigned to the generation that is two generations below T. 
However, since GC's parent, C, is deceased at the time of the 
transfer, GC will be treated as a member of the generation that is 
one generation below T. As a result, GC is not a skip person and the 
transfer to GC is not a direct skip.


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

    (a) In general. Except as provided in paragraph (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. Notwithstanding paragraph (a) of this section, an 
adopted individual (as defined in this paragraph) 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) Legally adopted by the adoptive parent;
    (2) A descendant of a parent of the adoptive parent (or the spouse 
or former spouse of the adoptive parent);
    (3) Under the age of 18 at the time of the adoption; and
    (4) Not adopted primarily for the purpose of avoiding GST tax. The 
determination of whether an adoption is primarily for GST tax-avoidance 
purposes is made based upon all of the facts and circumstances. The 
most significant factor is whether there is a bona fide parent/child 
relationship between the adoptive parent and the adopted individual, in 
which the adoptive parent has fully assumed all significant 
responsibilities for the care and raising of the adopted child. Other 
factors may include (but are not limited to), at the time of the 
adoption--
    (i) The age of the adopted individual (for example, the younger the 
age of the adopted individual, or the age of the youngest of siblings 
who are all adopted together, the more likely the adoption will not be 
considered primarily for GST tax-avoidance purposes); and
    (ii) The relationship between the adopted individual and the 
individual's parents (for example, objective evidence of the absence or 
incapacity of the parents may indicate that the adoption is not 
primarily for GST tax-avoidance purposes).
    (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) or (c) 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.
    (d) Example. The following example illustrates the provisions of 
this section:

    Example. T has a child, C. C has a 20-year-old child, GC. T 
legally adopts GC and transfers $100,000 to GC. GC's generation 
assignment is determined by section 2651(b)(1) and GC is assigned to 
the generation that is two generations below T. In addition, because 
T has legally adopted GC, GC is generally treated as a child of T 
under state law. Under these circumstances, GC is an individual who 
is assigned to more than one generation and the exception in Sec.  
26.2651-2(b) does not apply. Thus, the special rule under section 
2651(f)(1) applies and GC is assigned to the generation that is two 
generations below T. GC remains a skip person with respect to T and 
the transfer to GC is a direct skip.


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 July 18, 2005.
    (b) Transition rule. In the case of transfers occurring after 
December 31, 1997, and before July 18, 2005,

[[Page 41144]]

taxpayers may rely on any reasonable interpretation of section 2651(e). 
For this purpose, these final regulations, as well as the proposed 
regulations issued on September 3, 2004 (69 FR 53862), are treated as a 
reasonable interpretation of the statute.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: June 30, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury.
[FR Doc. 05-13799 Filed 7-15-05; 8:45 am]
BILLING CODE 4830-01-P