IRC Section 2641 defines the GST inclusion ratio, a key metric that determines how much generation skipping transfer tax applies to a given transfer. The inclusion ratio measures the extent to which a transfer is sheltered by GST exemption versus exposed to GST tax, with a ratio of zero meaning fully exempt and a ratio of one meaning fully taxable at the GST rate. The ratio is calculated based on the relationship between the amount of GST exemption allocated and the value of property transferred, with detailed rules for timing and adjustments. In life insurance and dynasty trust planning, Section 2641 is crucial because it affects how much of a policy funded trust distribution will be subject to GST tax and how powerful early, strategic exemption allocations can be when combined with life insurance leverage and long term compounding.

In day to day planning, advisors rarely compute inclusion ratios themselves, but they rely on the concept embodied in IRC Section 2641 when working with attorneys and tax professionals on GST efficient designs. For example, when funding a dynasty ILIT with premiums for a large survivorship policy, the client may allocate sufficient GST exemption at inception to drive the inclusion ratio to zero, making future death benefit proceeds and trust distributions GST free. If only partial exemption is allocated, the resulting inclusion ratio will fall between zero and one, meaning that future transfers will be partially taxable. Advisors explain that complete and timely exemption allocations can dramatically increase the net impact of a life insurance funded trust, especially when policy values and trust assets grow over decades. Understanding Section 2641 helps producers frame life insurance as a tool that multiplies the benefits of well planned GST exemption strategies in multigenerational wealth transfer.