Which of the following statements best reflects the inclusion ratio when a portion of a trust is allocated to skip beneficiaries and the rest to non-skip beneficiaries?

• A. 0%
• B. 50%
• C. 75%
• D. 25%

Answer: (C)

Inclusion ratio shows what share of a trust’s distributions to skip beneficiaries will be treated as subject to generation-skipping transfer (GST) tax. It’s determined by how much of the trust’s value is sheltered by GST exemption. The portion not shielded by exemption is the part that is included for GST tax purposes, so the ratio is 1 minus the sheltered portion.

If you’ve allocated 25% of the trust’s value to non-skip beneficiaries or otherwise exempted that portion, then 25% is sheltered and 75% remains subject to GST tax for skip distributions. That gives an inclusion ratio of 0.75, or 75%.

Non-skip distributions aren’t subject to GST tax and don’t change this calculation; the inclusion ratio specifically governs the skip portion.