Spouse gets 120 days to opt out of automatic GST exemption allocations

Plain-English summary

A donor created an irrevocable trust with generation-skipping transfer tax potential and later made gifts to it over a series of years. The donor and spouse intended not to allocate their GST exemptions to those transfers, but the family company's tax department did not advise them about the automatic-allocation rules or the election to opt out. Their gift tax returns therefore omitted the required election statements. After the tax department discovered the errors, the spouse requested an extension based on reasonable reliance on qualified tax professionals. The IRS granted 120 days to elect under IRC § 2632(c)(5) that the automatic allocation rules do not apply to the spouse's transfers for the affected years. The spouse must make the election on supplemental Forms 709 and attach the ruling.

Ruling snapshot

• Question: May the spouse belatedly opt out of the automatic allocation of GST exemption to transfers made to the trust?
• Outcome: Approved, with supplemental Forms 709 due within 120 days
• Key authorities: IRC §§ 2632(c), 2642(g); Treas. Reg. §§ 26.2632-1(b)(2)(iii), 301.9100-3; Notice 2001-50

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201903003                                             Third Party Communication: None
Release Date: 1/18/2019                                       Date of Communication: Not Applicable
Index Number: 9100.00-00, 2632.00-00,
              2642.00-00                                      Person To Contact:
                                                              --------------------------, ID No. ----------------
-----------------------------                                 -----------------
---------------------------------------                       Telephone Number:
----------------------------------                            ----------------------
                                                              Refer Reply To:
                                                              CC:PSI:B04
                                                              PLR-110074-18
                                                              Date:
                                                              September 24, 2018

Re: --------------------------------------------------------------------------------------------------------------

Legend

Donor             - -------------------------------------------------------
Spouse            - ----------------------------------------------------------
Date 1            - ---------------------------
Year 1            - -------
Year 2-17         - ---------------
Trust             - ------------------------------------------------------------------------------------------------
Company           - --------------------------------

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

This letter responds to the letter dated March, 26, 2018, 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
make an election under § 2632(c)(5) to opt out of the generation-skipping transfer
(GST) exemption automatic allocation rules under § 2632(c) with respect to transfers to
a trust.

FACTS

The facts submitted and the representations made are as follows:

On Date 1 in Year 1, a date prior to December 31, 2000, Donor created Trust, an
irrevocable trust, for the benefit of a child and the child’s issue. Trust has generation-
skipping transfer (GST) tax potential.

Prior to December 31, 2000, Donor and Spouse made gifts to Trust but did not allocate
their GST exemption to Trust. Subsequent to December 31, 2000, Donor made gifts to
Trust in Years 2 through 17.

Donor and Spouse retained the Tax Department of Company, a family owned company,
to advise and prepare their Year 2 through 17 Forms 709 (United States Gift (and
Generation-Skipping Transfer) Tax Return reporting the Year 2 through 17 transfers to
Trust. Both Donor and Spouse elected to split the gifts to Trust for those years.
Although Donor and Spouse did not intend for GST exemption to be allocated to the
Year 2 through 17 transfers, Company’s tax professionals failed to advise Donor or
Spouse 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). Therefore, Donor and Spouse failed to elect out
of the automatic allocation of GST exemption for the Year 2 through 17 transfers to
Trust. The Tax Department discovered these errors upon review of the Forms 709.

Spouse requests an extension of time to elect out of the automatic allocation rules with
respect to the Year 2 through 17 transfers to Trust.

LAW AND ANALYSIS

Section 2601 imposes a tax on every generation-skipping transfer (GST) made by a
“transferor” to a “skip person.” 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 GST 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 2631(c) provides that, for purposes of § 2631(a), the GST exemption amount
for any calendar year shall be equal to the basic exclusion amount under § 2010(c) for
such calendar year.

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
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) provides that an individual may elect to have the automatic
allocation rules of § 2632(c)(1) not apply to an indirect skip, or any or all transfers made
by such individual to a particular trust. Section 2632(c)(5)(B)(ii) provides that the
election may be made on a timely filed gift tax return for the calendar year for which the
election is to become effective.

Section 26.2632-1(b)(2)(iii)(A)(2) of the Generation-Skipping Transfer Tax Regulations
provides, in part, that a transferor may prevent the automatic allocation of GST
exemption (elect out) with respect to any transfer or transfers constituting an indirect
skip made to a trust. A transferor may 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 the 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
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 GST 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
301.9100-2 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, Spouse 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 do not apply to the Year 2 through 17
transfers to Trust.

Spouse should make the election on supplemental Forms 709 for Year 2 through 17.
The supplemental Forms 709 should be filed with the Cincinnati Service Center at the
following address: Internal Revenue Service Center, Cincinnati, OH 45999. A copy of

this letter should be attached to the supplemental Form 709. A copy is enclosed for this
purpose.

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

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.

                                    Sincerely,

                                    Associate Chief Counsel
                                    (Passthroughs and Special Industries)

                                   Lorraine E. Gardner
                               By: _____________________________
                                   Lorraine E. Gardner, Senior Counsel
                                   Branch 4
                                   Office of Associate Chief Counsel
                                   (Passthroughs and Special Industries)



Enclosures
     Copy for § 6110 purposes
     Copy of this letter



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