Spouse's GST-exemption allocations to three children's trusts ruled void for lack of GST potential

Plain-English summary

A father set up three nearly identical irrevocable trusts, one for each of his three children, funding them with gifts over two years. He and his wife split the gifts for tax purposes (gift-splitting under Section 2513) and each spouse then allocated part of their generation-skipping transfer (GST) tax exemption to the trusts, a scarce lifetime allowance you do not want to waste. The wife asked the IRS to rule that her allocations were void because these trusts had no GST potential as to her. The IRS agreed: each trust benefits a child (not a "skip person" two generations down), and because each child holds a general power of appointment that pulls the trust into the child's own estate, the child, not the wife, becomes the transferor for any later generation-skipping payments. Under Treasury Regulation § 26.2632-1(b)(4)(i), an allocation to a trust with no GST potential as to the transferor is void, so the wife's allocations do not count, freeing up her exemption.

Ruling snapshot

• Question: Are the spouse's allocations of GST exemption to the three children's trusts void because the trusts had no GST potential as to her?
• Outcome: Approved (allocations ruled void under Treas. Reg. § 26.2632-1(b)(4)(i))
• Key authorities: IRC §§ 2632, 2631, 2513, 2642, 2041(a)(2), 2652(a)(1)(B); Treas. Reg. § 26.2632-1(b)(4)(i)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201836004 Third Party Communication: None
Release Date: 9/7/2018 Date of Communication: Not Applicable
Index Number: 2632.00-00
Person To Contact:
-------------------------------------------- -----------------------------------------------------
--------------- ----------------------------------------
-------------------------- Telephone Number:
-------------------
Refer Reply To:
CC:PSI:B04
PLR-117071-18
Date:
--------------------------------------------------- June 05, 2018

Legend

Taxpayer ---------------------------------------------------------------------------------------------
Spouse ----------------------------------------------------------------------------------------------------------
-----------------------------------
Date -------------------------
Year 1 ------
Year 2 ------
Trust 1 ----------------------------------------------------------------------------------------------------------
----
Trust 2 ----------------------------------------------------------------------------------------------------------
Trust 3 ----------------------------------------------------------------------------------------------------------
------------------
Child 1 --------------------------
Child 2 -------------------------------
Child 3 --------------------------------
Accountant -------------------------
a ----
w ---
c ----
x ---
e ----
y ---
z ---

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

   This letter responds to your authorized representative's letter dated

November 9, 2017, and subsequent correspondence, requesting a generation-skipping
transfer (GST) tax ruling with respect to transfers made to three trusts.

    The facts and representations submitted are summarized as follows:

   On Date in Year 1, Taxpayer established three irrevocable trusts, Trust 1,

Trust 2, and Trust 3, for the primary benefit of his three children, Child 1, Child 2, and
Child 3, respectively. The terms of the three trusts are substantially identical except for
the named primary beneficiary. Under the terms of each trust, the trustee may make
discretionary distributions of income for the health, education, and support of the
primary beneficiary. Following the death of the second to die of Taxpayer and Spouse,
the trustee may make discretionary distributions of principal for the health, education,
and support of the primary beneficiary. The primary beneficiary has the right to
withdraw the principal of the trust in the following proportions when the beneficiary
reaches the following ages: a at age w, c at age x, e at age y, and the remainder at age
z.

   Furthermore, each trust grants the primary beneficiary of each respective trust a

testamentary power to appoint the assets held in the trust to the primary beneficiary's
estate, the creditors of the primary beneficiary's estate, or to any person or corporation.
To the extent such power is not effectively exercised, the assets of the trust will be
administered as otherwise provided in the trust agreement. If the primary beneficiary
dies before the complete distribution of the trust, the trustee will, subject to the
provisions of the power of appointment, distribute the trust assets in fee and per stirpes
to the primary beneficiary's then living descendants.

   Taxpayer made gifts to the trusts in Year 1 and Year 2. Taxpayer and Spouse,

through their Accountant, each filed a timely Form 709, United States Gift (and
Generation-Skipping Transfer) Tax Return for Year 1 and Year 2. On each form,
Taxpayer and Spouse signified their consent to treat the Year 1 and Year 2 transfers as
having been made one-half by each spouse under § 2513. On the Year 1 and Year 2
returns filed by Taxpayer, Taxpayer erroneously allocated GST exemption to the
transfers to the three trusts. On the Year 1 and Year 2 returns filed by Spouse, Spouse
erroneously allocated GST exemption to the transfers to the three trusts. There have
been no taxable distributions or taxable terminations with respect to the three trusts that
would result in a GST tax liability on the part of any of such trusts or their beneficiaries.

   Spouse requests a ruling that the allocations of GST exemption made to the

three trusts are void because there was no GST potential with respect to those
transfers.

LAW AND ANALYSIS

   Section 2513(a)(1) provides that a gift made by one spouse to any person other

than his spouse shall, for purposes of this chapter, be considered as made one-half by
him and one-half by his spouse, but only if at the time of the gift each spouse is a citizen
or resident of the United States.

   Section 2601 provides that a tax is imposed on every generation-skipping

transfer (GST). Section 2611(a) provides that the term "generation-skipping transfer"
means: (1) a taxable distribution; (2) a taxable termination; and (3) a direct skip.

   Section 2613 defines a skip person, in part, as a natural person assigned to a

generation which is two or more generations below the generation assignment of the
transferor.

   Section 2602 provides that the amount of GST tax is the taxable amount

multiplied by the applicable rate.

   Section 2641(a) defines the applicable rate as the product of the maximum

estate tax rate and the inclusion ratio with respect to the transfer.

    Under § 2642(a)(1), the inclusion ratio with respect to any property transferred in

a generation-skipping transfer is generally defined as the excess of one over the
applicable fraction. The applicable fraction, as defined in § 2642(a)(2), is a fraction, the
numerator of which is the amount of GST exemption under § 2631 allocated to the trust
(or to property transferred in a direct skip), and the denominator of which is the value of
the property transferred to the trust or involved in the direct skip.

   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 2631(c) provides that, for purposes of § 2631(a), the GST exemption

amount for any calendar year shall be equal to the applicable exclusion amount under
§ 2010(c) for such calendar year.

     Section 2632(a) 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 26.2632-1(b)(4)(i) provides, in part, that an allocation of GST exemption

to property transferred during the transferor's lifetime, other than in a direct skip, is
made on Form 709. The allocation must clearly identify the trust to which the allocation
is being made, the amount of GST exemption allocated to it, and if the allocation is late
or if an inclusion ratio greater than zero is claimed, the value of the trust assets at the
effective date of the allocation. With respect to a timely allocation, an allocation of GST
exemption becomes irrevocable after the due date of the return. Except as provided in
§ 26.2642-3 (relating to charitable lead annuity trusts), an allocation of GST exemption
to a trust is void to the extent the amount allocated exceeds the amount necessary to
obtain an inclusion ratio of zero with respect to the trust. An allocation is also void if the
allocation is made with respect to a trust that has no GST potential with respect to the
transferor making the allocation, at the time of the allocation. For this purpose, a trust
has GST potential even if the possibility of a GST is so remote as to be negligible.

   Section 2041(a)(2) includes in the gross estate property over which the decedent

has at the time of his death a general power of appointment created after October 20,
1942.

  Section 2652(a)(1)(B) provides that in the case of property subject to the gift tax,

the donor is the transferor for GST purposes.

   Section 2642(b)(1) provides, in relevant part, that if the allocation of the GST

exemption to any transfers of property is made on a timely filed gift tax return or is
deemed to be made under § 2632(b)(1) or (c)(1), the value of such property for
purposes of determining the inclusion ratio shall be its value as finally determined for gift
tax purposes and such allocation shall be effective on and after the date of such
transfer.

    In this case, at the time of the allocation of GST exemption to the three trusts, the

trusts had no GST potential with respect to Spouse. The primary beneficiary of each
trust is a child of the Taxpayer. The trustee is authorized to make payments of income
and principal to the primary beneficiary and the primary beneficiary may withdraw
amounts of principal from the primary beneficiary's trust when the primary beneficiary
reaches a certain age. None of these payments are payments to skip persons and are
therefore not generation-skipping transfers with respect to Spouse. When the primary
beneficiary dies, payments from the trust are subject to the primary beneficiary's
general power of appointment, causing the trust to be includible in the child's gross
estate under § 2041(a)(2). As a result, the primary beneficiary, and not Spouse, will be
the transferor of any payments made from the trust after the death of the primary
beneficiary under § 2652(a)(1)(B). Accordingly, based on the facts submitted and the
representations made, we conclude that Spouse's allocation of GST exemption to the
three trusts is void under § 26.2632-1(b)(4)(i).

  In accordance with the Power of Attorney on file with this office, we have sent a

copy of this letter to your authorized representatives.

   Except as expressly provided herein, we neither express nor imply any opinion

concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.

  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.

  This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.

                                     Sincerely,

                                     Leslie H. Finlow
                                     _________________________
                                     Leslie H. Finlow
                                     Senior Technician Reviewer, Branch 4
                                     Office of the Associate Chief Counsel
                                     (Passthroughs and Special Industries)




  Enclosures
        Copy for § 6110 purposes
        Copy of this letter