The zero-inclusion ratio is used for Generation-Skipping Transfer (GST) tax purposes. A zero inclusion ratio is obtained when the amount of GST exemption allocated equals the value of the property transferred.
Inclusion Ratio = 1 – (GST exemption allocated / FMV of property transferred)
For example, a grandparent gifts $50,000 of cash to her grandchild (skip person) and wants to allocate $50,000 of her lifetime GST exemption to the transfer. The inclusion ratio is zero.
0 = 1 – ($50,000 / $50,000)
An inclusion ratio of 1.00 means the entire transfer is subject to GST, while an inclusion ratio between 0 and 1 indicates the transfer is partially subject to GST. The allocation of GST is reported on the Form 709 (U.S. Gift & GST Tax Return).