Inclusion Ratio

The inclusion ratio is the fraction of a distribution from an individual or trust that is subject to generation skipping transfer tax (GST).  For example, if a lead trust distributes $1,000,000 to a "skip person" and the inclusion ratio is .40, the amount of the distribution that will be subject to GST is .40 x $1,000,000 or $400,000.

Life income plan payments:

For life income plans that make distributions that are subject to GST, the inclusion ratio equals:

1 - (GST exemption used / (funding amount - charitable deduction))

For example, if the funding amount is $1,000,000, the charitable deduction is $400,000 and the GST exemption used is $500,000, the GST inclusion ratio is:

1 - ((500,000 / (1,000,000 - 400,000)) = 0.16667

Bequests and trust distributions:

Computing the inclusion ratio for trust distributions can be complicated.

Lead unitrusts:  IR = 1 - (GST exemption used / (principal placed in trust - gift tax deduction)).

Lead annuity Trusts:  IR = (principal at termination - GST adjusted exemption) / principal at termination.

Regular irrevocable trusts:  IR = 1 - (GST exemption used /principal placed in trust).

Bequests to individuals (includes No Trust option in Lead Trust Projections):  IR = (bequest amount - estate tax on bequest* -GST - GST exemption used) / bequest amount - estate tax on bequest* - GST).

*  In the No Trust case in Lead Trust Projections, estate tax on bequest = (principal after num years - (net estate & princ. to family – net estate w/o gross principal) )