A grandparent establishes an irrevocable trust with income to her child for his life and then to his children. She funds the trust with assets valued at $4,000,000 and allocates $1,000,000 of her lifetime GST exemption. The inclusion ratio for this trust is:

A grandparent establishes an irrevocable trust with income to her child for his life and then to his children. She funds the trust with assets valued at $4,000,000 and allocates $1,000,000 of her lifetime GST exemption. The inclusion ratio for this trust is:

• A. 0
• B. 25%
• C. 50%
• D. 75%

Answer: (D)

GST inclusion ratio shows what portion of a generation-skipping transfer is subject to GST tax. It’s 1 minus the portion of the transfer sheltered by GST exemption. Here, the trust is funded with 4,000,000 in value and 1,000,000 of GST exemption is allocated. The sheltered fraction is 1,000,000 / 4,000,000 = 0.25 (25%). Subtracting from 1 gives 0.75, or 75%. So, 75% of the trust’s value is included for GST tax purposes (subject to GST tax) while 25% is sheltered by the exemption.

GST inclusion ratio shows what portion of a generation-skipping transfer is subject to GST tax. It’s 1 minus the portion of the transfer sheltered by GST exemption.

Here, the trust is funded with 4,000,000 in value and 1,000,000 of GST exemption is allocated. The sheltered fraction is 1,000,000 / 4,000,000 = 0.25 (25%). Subtracting from 1 gives 0.75, or 75%.

So, 75% of the trust’s value is included for GST tax purposes (subject to GST tax) while 25% is sheltered by the exemption.