Estate receives 120 days to elect out of automatic GST allocation

Plain-English summary

A decedent transferred limited-partnership interests to three irrevocable trusts primarily benefiting the decedent's children. The law firm that prepared the trusts and gift-tax return failed to advise the decedent about automatic allocation of generation-skipping transfer exemption and did not elect out under IRC § 2632(c)(5). The decedent had not intended to allocate GST exemption to those transfers. Because the failure resulted from reliance on a qualified tax professional, the IRS found the requirements of Treasury Regulation § 301.9100-3 satisfied. The estate received 120 days to file a supplemental Form 709 electing out of automatic allocation for all three transfers.

Ruling snapshot

• Question: Could the estate make late elections to prevent automatic allocation of GST exemption to transfers to three trusts?
• Outcome: approved
• Key authorities: IRC §§ 2632(c)(5) and 2642(g); Treas. Reg. §§ 26.2632-1(b)(2)(iii) and 301.9100-3; Notice 2001-50

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201729018 Third Party Communication: None
Release Date: 7/21/2017 Date of Communication: Not Applicable
Index Number: 2632.00-00, 2642.00-00,
9100.00-00 Person To Contact:
----------------, ID No. ------------------
---------------------------------- Telephone Number:
------------------------------ ----------------------
---------------------------------------- Refer Reply To:
CC:PSI:04
PLR-137691-16
--------------------------------------------------- Date:
March 27, 2017

LEGEND

Date = ----------------------
Year = -------
Decedent = ----------------------------------------------------
Trust 1 = ----------------------------------------
Trust 2 = --------------------------------------------
Trust 3 = --------------------------------------------------
Child 1 = --------------------
Child 2 = -----------------------
Child 3 = ------------------------------
y = ---------
Company = -------------------------
Law Firm = ------------------------------------------------------------------

Dear --------------:

This letter responds to the letter dated November 29, 2016, submitted by your
authorized representative, requesting an extension of time pursuant to § 2642(g) of the
Internal Revenue Code and § 301.9100-3 of the Procedure and Administration
Regulations to elect out of the generation-skipping transfer (GST) exemption automatic
allocation rules.

FACTS

The facts and representations submitted are as follows.
PLR-137691-16 2

On Date, in Year (a date after December 31, 2000), Decedent established three
irrevocable trusts, Trust 1, Trust 2, and Trust 3, for the primary benefit of Child 1,
Child 2, and Child 3, respectively. On the same day, Decedent transferred a y% limited
partnership interest in Company to each of Trust 1, Trust 2, and Trust 3. Trust 1,
Trust 2, and Trust 3 have GST tax potential.

Decedent retained Law Firm to prepare, establish, and provide advice with respect to
Trust 1, Trust 2, and Trust 3 and to prepare any necessary tax returns. Law Firm failed
to advise Decedent of the rules under § 2632(c) regarding the automatic allocation of
GST exemption and the ability to elect out of the automatic allocation of GST exemption
by making an election under § 2632(c)(5). On a timely filed Form 709 (United States
Gift (and Generation-Skipping Transfer) Tax Return), Law Firm reported Decedent’s
Date transfers to Trust 1, Trust 2, and Trust 3. However, Law Firm failed to opt out of
the automatic allocation of GST exemption for the Date transfers to Trust 1, Trust 2, and
Trust 3. At the time of the Date transfers, Decedent did not intend for GST exemption to
be allocated to the transfers to Trust 1, Trust 2, and Trust 3, which were established to
primarily benefit Decedent’s children.

Child 1, as the executor of Decedent’s estate, requests an extension of time to elect out
of the automatic allocation rules with respect to Decedent’s Date transfers to Trust 1,
Trust 2, and Trust 3.

LAW AND ANALYSIS

Section 2601 imposes a tax on every GST. A GST is defined under § 2611(a) as
(1) a taxable distribution, (2) a taxable termination, and (3) a direct skip.

Section 2602 provides that the amount of the tax imposed by § 2601 is the taxable
amount multiplied by the applicable rate. Section 2641(a) defines the applicable rate as
the product of the maximum federal estate tax rate and the inclusion ratio with respect
to the transfer.

Section 2631(a) provides that, for purposes of determining the inclusion ratio, every
individual shall be allowed a GST exemption amount which may be allocated by such
individual (or his executor) to any property with respect to which such individual is the
transferor.

Section 2631(b) provides that any allocation under § 2631(a), once made, shall be
irrevocable.

Section 2632(a)(1) provides that any allocation by an individual of his or her GST
exemption under § 2631(a) may be made at any time on or before the date prescribed
for filing the estate tax return for such individual’s estate (determined with regard to
extensions), regardless of whether such a return is required to be filed. Section
PLR-137691-16 3

2632(a)(2) provides that the manner in which allocations are to be made shall be
prescribed by forms or regulations issued by the Secretary.

Section 2632(c)(1) provides that if any individual makes an “indirect skip” during such
individual’s lifetime, any unused portion of such individual’s GST exemption is treated
as allocated to the property transferred to the extent necessary to make the inclusion
ratio for such property zero. If the amount of the indirect skip exceeds such unused
portion, the entire unused portion shall be allocated to the property transferred.

Under § 2632(c)(3)(A), the term “indirect skip” means any transfer of property (other
than a direct skip) subject to the tax imposed by chapter 12 made to a GST trust, as
defined in § 2632(c)(3)(B). Under § 2632(c)(3)(B), a GST trust is a trust that could have
GST potential with respect to the transferor unless the trust satisfies any of the
exceptions listed in § 2632(c)(3)(B)(i)-(vi).

Section 2632(c)(5)(A)(i)(I) provides that an individual may elect to have § 2632(c)(1) not
apply to an indirect skip.

Section 26.2632-1(b)(2)(iii)(A)(2) of the Generation-Skipping Transfer Tax Regulations
provides, in relevant part, that a transferor may prevent the automatic allocation of GST
exemption (elect out) with respect to one or more (or all) current-year transfers made by
the transferor to a specified trust or trusts.

Section 26.2632-1(b)(2)(iii)(B) provides that to elect out, the transferor must attach an
election out statement to a Form 709 filed within the time period provided in
§ 26.2632-1(b)(2)(iii)(C). In general, the election out statement must identify the trust,
and specifically must provide that the transferor is electing out of the automatic
allocation of GST exemption with respect to the described transfer or transfers. Under
§ 26.2632-1(b)(2)(iii)(C), to elect out, the Form 709 with the attached election out
statement must be filed on or before the due date for timely filing the Form 709 for the
calendar year in which: (1) for a transfer subject to § 2642(f), the ETIP closes; or (2) for
all other elections out, the first transfer to be covered by the election out was made.

Section 2642(g)(1)(A) provides, generally, that the Secretary shall by regulation
prescribe such circumstances and procedures under which extensions of time will be
granted to make an allocation of GST exemption described in § 2642(b)(1) or (2), and
an election under § 2632(b)(3) or (c)(5).

Section 2642(g)(1)(B) provides that in determining whether to grant relief under
§ 2642(g)(1), the Secretary shall take into account all relevant circumstances, including
evidence of intent contained in the trust instrument or instrument of transfer and such
other factors as the Secretary deems relevant. For purposes of determining whether to
grant relief, the time for making the allocation (or election) shall be treated as if not
PLR-137691-16 4

expressly prescribed by statute.

Notice 2001-50, 2001-2 C.B. 189, provides that, under § 2642(g)(1)(B), the time for
allocating the GST exemption to lifetime transfers and transfers at death, the time for
electing out of the automatic allocation rules, and the time for electing to treat any trust
as a generation-skipping transfer trust are to be treated as if not expressly prescribed by
statute. The Notice further provides that taxpayers may seek an extension of time to
make an allocation described in § 2642(b)(1) or (b)(2) or an election described in
§ 2632(b)(3) or (c)(5) under the provisions of § 301.9100-3.

Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will
use to determine whether to grant an extension of time to make an election.
Section 301.9100-1(a).

Section 301.9100-2 provides an automatic extension of time for making certain
elections. Section 301.9100-3 provides the standards used to determine whether to
grant an extension of time to make an election whose date is prescribed by a regulation
(and not expressly provided by statute). In accordance with § 2642(g)(1)(B) and
Notice 2001-50, taxpayers may seek an extension of time to make an allocation
described in § 2642(b)(1) or (b)(2) or an election described in § 2632(b)(3) or (c)(5)
under the provisions of § 301.9100-3.

Section 301.9100-3(a) provides, in part, that requests for relief subject to § 301.9100-3
will be granted when the taxpayer provides the evidence to establish to the satisfaction
of the Commissioner that the taxpayer acted reasonably and in good faith, and the grant
of relief will not prejudice the interests of the Government.

Section 301.9100-3(b)(1)(v) provides that a taxpayer is deemed to have acted
reasonably and in good faith if the taxpayer reasonably relied on a qualified tax
professional, including a tax professional employed by the taxpayer, and the tax
professional failed to make, or advise the taxpayer to make, the election.

Based on the facts submitted and the representations made, we conclude that the
requirements of § 301.9100-3 have been satisfied. Accordingly, Decedent’s estate is
granted an extension of time of 120 days from the date of this letter to make an election
under § 2632(c)(5) that the automatic allocation rules not apply to the Date transfers to
Trust 1, Trust 2, and Trust 3. The election should be made on a supplemental
Form 709 for Year. The Form 709 should be filed with the Cincinnati Service Center at
the following address: Internal Revenue Service, Cincinnati Service Center - Stop 82,
Cincinnati, OH 45999. You should attach a copy of this letter to the supplemental
Form 709. We have enclosed a copy for this purpose.
PLR-137691-16 5

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

                                   Sincerely,

                                   Associate Chief Counsel
                                   (Passthroughs & Special Industries)

                                   Karlene M. Lesho
                                By:______________________________
                                   Karlene M. Lesho
                                   Senior Technician Reviewer, Branch 4
                                   Office of Associate Chief Counsel
                                   (Passthroughs & Special Industries)

Enclosures (2)
Copy for § 6110 purposes
Copy of this letter

cc: