Estate gets 120 days to allocate GST exemption to four trusts

Plain-English summary

A decedent created an irrevocable trust that was divided into three separate trusts for the primary benefit of the decedent's children. The governing instrument stated an intent for the original trust and all three separate trusts to be exempt from generation-skipping transfer tax. The decedent made transfers to the trusts over four years, but the accounting firm preparing the gift tax returns failed to allocate GST exemption to them. An attorney discovered the omission after the decedent's death, and the estate represented that the decedent had enough unused exemption at death to cover the transfers. The IRS granted 120 days to allocate the exemption on supplemental Forms 709 for all four years. The allocations will take effect as of the transfer dates and use the values determined for federal transfer-tax purposes.

Ruling snapshot

• Question: May the estate make late allocations of the decedent's GST exemption to transfers made to the original trust and its three separate trusts?
• Outcome: Approved, with supplemental Forms 709 due within 120 days
• Key authorities: IRC §§ 2631, 2632(a), 2642(a), 2642(b), 2642(g); Treas. Reg. §§ 26.2632-1(b)(4)(i), 301.9100-3; Notice 2001-50

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201903013                                             Third Party Communication: None
Release Date: 1/18/2019                                       Date of Communication: Not Applicable
Index Number: 2642.00-00, 9100.00-00
                                                              Person To Contact:
------------------------------------                          ----------------------, ID No. ------------------
---------------------------------------                       Telephone Number:
--------------------------------------------                  ----------------------
-------------------------------------------                   Refer Reply To:
 ------------------------------------------                   CC:PSI:B4
                                                              PLR-117972-18
                                                              Date:
                                                              October 18, 2018




Legend

Decedent                =        -----------------------
Exempt Trust            =        -----------------------------------------------------------------------------------
Exempt Trust A          =        ---------------------------------------------------
                          -------------------------
Exempt Trust B          =        ------------------------------------------
                                 -------------------------
Exempt Trust C          =        ---------------------------------------------
                                 ------------------------
Date 1                  =        ---------------------------
Date 2                  =        -------------------
Year 1                  =        -------
Year 2                  =        -------
Year 3                  =        -------
Year 4                  =        -------
Accounting Firm         =        --------------------------------------
Attorney                =        ------------------------

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

This ruling responds to your authorized representative’s letter of May 22, 2018,
requesting an extension of time under § 2642(g) of the Internal Revenue Code and
§§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to
allocate generation-skipping transfer (GST) exemption.

The facts and representations submitted are summarized as follows:

On Date 1, a date in Year 1, Decedent created Exempt Trust, an irrevocable trust for
the primary benefit of Decedent’s three children. The governing instrument of Exempt

Trust directs the trustee to immediately divide the estate of Exempt Trust into three
separate trusts to be administered and distributed by the trustee as provided in the
governing instrument of Exempt Trust. The governing instrument of Exempt Trust
further provides that the three separate trusts shall be designated as Exempt Trust A,
Exempt Trust B, and Exempt Trust C and that one-third of the trust estate of Exempt
Trust shall be allocated to each such separate trust. Exempt Trust, Exempt Trust A,
Exempt Trust B, and Exempt Trust C have generation-skipping transfer (GST) potential,
and the governing instrument of Exempt Trust states Decedent’s intention that each
such trust be exempt from GST tax.

In Year 1, a year ending on or before December 31, -------, Decedent made a transfer to
Exempt Trust. In Year 2, Year 3, and Year 4, also years ending on or before
December 31, -------, Decedent made transfers directly to Exempt Trust A, Exempt Trust
B, and Exempt Trust C.

Accounting Firm prepared and filed a timely Form 709, United States Transfer (and
Generation-Skipping Transfer) Tax Return for each of Year 1, Year 2, Year 3, and
Year 4, to report Decedent’s respective transfers to Exempt Trust, Exempt Trust A,
Exempt Trust B, and Exempt Trust C. Accounting Firm failed to properly allocate
Decedent’s GST exemption to the respective transfers.

Decedent died on Date 2. The failure to properly allocate Decedent’s GST exemption
was discovered by Attorney upon a review of Decedent’s estate. It is represented that
on the date of Decedent’s death, Decedent had sufficient GST exemption to allocate to
the Year 1, Year 2, Year 3, and Year 4 transfers. You request an extension of time
under § 2642(g) and §§ 301.9100-1 and 301.9100-3 to allocate Decedent’s GST
exemption to these transfers.

Law and Analysis

Section 2601 imposes a tax on every GST, which 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 GST tax is the taxable amount multiplied
by the applicable rate. Section 2641(a) defines “applicable rate” as the product of the
maximum federal estate tax rate and the inclusion ratio with respect to the transfer.

Section 2642(a)(1) provides that for purposes of chapter 13, the inclusion ratio with
respect to any property transferred in a GST is generally defined as the excess (if any)
of 1 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 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) reduced by the sum of
certain taxes and charitable deductions.

Section 2631(a), as in effect for all relevant years, provides that for purposes of
determining the inclusion ratio, every individual shall be allowed a GST exemption of
$1,000,000 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
once an allocation of GST exemption is made, it is irrevocable.

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 that an allocation of GST exemption to property
transferred during the transferor’s lifetime, other than a direct skip, is made on
Form 709.

Section 2642(b)(1) provides that, except as provided in § 2642(f), if the allocation of the
GST exemption to any transfers of property is made on a transfer tax return filed on or
before the date prescribed by § 6075(b) for such transfer, the value of such property for
purposes of § 2642(a) shall be its value as finally determined for purposes of chapter 12
(within the meaning of § 2001(f)(2) and such allocation will be effective on and after the
date of such transfer.

Section 2642(g)(1)(A) provides 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). Such regulations shall include procedures for requesting
comparable relief with respect to transfers made before the date of the enactment of
§ 2642(g)(1)(A).

Section 2642(g)(1)(B) provides that in determining whether to grant relief, 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 in part, that, under § 2642(g)(1)(B), the time
for allocating the GST exemption to lifetime transfers is to be treated as if not expressly
prescribed by statute and 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 301.9100-1(c) provides that the Commissioner has discretion to grant a
reasonable extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3
to make a regulatory election, or a statutory election (but no more than 6 months except
in the case of a taxpayer who is abroad), under all subtitles of the Code except subtitles
E, G, H, and I.

Section 301.9100-3(a) provides that, in general, requests for extension of time for
regulatory elections that do not meet the requirements of § 301.9100-2 must be made
under the rules of § 301.9100-3.

Section 301.9100-3 provides the standards used to determine whether to grant an
extension of time to make an election whose due 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.

Requests for relief under § 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 that granting 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 representations made, we conclude that the
requirements of § 301.9100-3 have been satisfied. Decedent’s estate is granted an
extension of time of 120 days from the date of this letter to allocate Decedent’s available
GST exemption to Decedent’s transfers made to Exempt Trust, Exempt Trust A,
Exempt Trust B, and Exempt Trust C in Year 1, Year 2, Year 3 and Year 4. The
allocations will be effective as of the date of the transfers, and the value of the transfers,
as determined for federal transfer tax purposes, will be used in determining the amount
of Decedent's GST exemption to be allocated. The allocation of GST exemption should
be made on supplemental Forms 709 for Year 1, Year 2, Year 3, and Year 4.

Decedent’s supplemental Forms 709 should be filed with the Cincinnati Service Center
at the following address: Internal Revenue Service, Cincinnati Service Center –
Stop 82, Cincinnati, Ohio 45999. A copy of this letter should be attached to the
supplemental Forms 709. A copy is enclosed for this purpose.

Except as expressly provided herein, we express no opinion on the federal tax
consequences of the transactions under the cited provisions or under any other
provisions of the Code.

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)

                                       Melissa C. Liquerman

                                   By: ____________________________
                                       Melissa C. Liquerman
                                       Chief, Branch 4
                                       Office of the Associate Chief Counsel
                                       (Passthroughs & Special Industries)

Enclosures (2)

       Copy of this letter
       Copy for § 6110 purposes


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