[Code of Federal Regulations]
[Title 26, Volume 8]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.663(c)-3]

[Page 118-119]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.663(c)-3  Applicability of separate share rule to certain trusts.

    (a) The applicability of the separate share rule provided by section 
663(c) to trusts other than qualified revocable trusts within the 
meaning of section 645(b)(1) will generally depend upon whether 
distributions of the trust are to be made in substantially the same 
manner as if separate trusts had been created. Thus, if an instrument 
directs a trustee to divide the testator's residuary estate into 
separate shares (which under applicable law do not constitute separate 
trusts) for each of the testator's children and the trustee is given 
discretion, with respect to each share, to distribute or accumulate 
income or to distribute principal or accumulated income, or to do both, 
separate shares will exist under section 663(c). In determining whether 
separate shares exist, it is immaterial whether the principal and any 
accumulated income of each share is ultimately distributable to the 
beneficiary of such share, to his descendants, to his appointees under a 
general or special power of appointment, or to any other beneficiaries 
(including a charitable organization) designated to receive his share of 
the trust and accumulated income upon termination of the beneficiary's 
interest in the share. Thus, a separate share may exist if the 
instrument provides that upon the death of the beneficiary of the share, 
the share will be added to the shares of the other beneficiaries of the 
trust.
    (b) Separate share treatment will not be applied to a trust or 
portion of a trust subject to a power to: (1) Distribute, apportion, or 
accumulate income, or (2) distribute corpus to or for one or more 
beneficiaries within a group or class of beneficiaries, unless payment 
of income, accumulated income, or corpus of a share of one beneficiary 
cannot affect the proportionate share of income, accumulated income, or 
corpus of any shares of the other beneficiaries, or unless substantially 
proper adjustment must thereafter be made (under the governing 
instrument) so that substantially separate and independent shares exist.
    (c) A share may be considered as separate even though more than one 
beneficiary has an interest in it. For example, two beneficiaries may 
have equal, disproportionate, or indeterminate interests in one share 
which is separate and independent from another share in which one or 
more beneficiaries have an interest. Likewise, the same person may be a 
beneficiary of more than one separate share.
    (d) Separate share treatment may be given to a trust or portion of a 
trust otherwise qualifying under this section if the trust or portion of 
a trust is subject to a power to pay out to a beneficiary of a share (of 
such trust or portion) an amount of corpus in excess of his 
proportionate share of the corpus of the trust if the possibility of 
exercise of the power is remote. For example, if the trust is subject to 
a power to invade the entire corpus for the health, education, support, 
or maintenance of A, separate share treatment is applied if exercise of 
the power requires consideration of A's other income which is so 
substantial as to make the possibility of exercise of the power remote. 
If instead it appears that A and B have separate shares in a trust, 
subject to a power to invade the entire corpus for the comfort, 
pleasure, desire, or happiness of A, separate share treatment shall not 
be applied.
    (e) For taxable years ending before December 31, 1978, the separate 
share

[[Page 119]]

rule may also be applicable to successive interests in point of time, as 
for instance in the case of a trust providing for a life estate to A and 
a second life estate or outright remainder to B. In such a case, in the 
taxable year of a trust in which a beneficiary dies items of income and 
deduction properly allocable under trust accounting principles to the 
period before a beneficiary's death are attributed to one share, and 
those allocable to the period after the beneficiary's death are 
attributed to the other share. Separate share treatment is not available 
to a succeeding interest, however, with respect to distributions which 
would otherwise be deemed distributed in a taxable year of the earlier 
interest under the throwback provisions of subpart D (section 665 and 
following), part I, subchapter J, chapter 1 of the Code. The application 
of this paragraph may be illustrated by the following example:

    Example. A trust instrument directs that the income of a trust is to 
be paid to A for her life. After her death income may be distributed to 
B or accumulated. A dies on June 1, 1956. The trust keeps its books on 
the basis of the calendar year. The trust instrument permits invasions 
of corpus for the benefit of A and B, and an invasion of corpus was in 
fact made for A's benefit in 1956. In determining the distributable net 
income of the trust for the purpose of determining the amounts 
includible in A's income, income and deductions properly allocable to 
the period before A's death are treated as income and deductions of a 
separate share; and for that purpose no account is taken of income and 
deductions allocable to the period after A's death.

[T.D. 6500, 25 FR 11814, Nov. 26, 1960; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 7633, 44 FR 57926, Oct. 9, 1979; T.D. 8849, 64 FR 72543, 
Dec. 28, 1999]