Taxable termination
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.