Late GST opt-out elections were granted for five trusts

Plain-English summary

A taxpayer made a taxable transfer to one trust by exercising a limited power over property that was also subject to a general testamentary power. The taxpayer also funded four irrevocable trusts that paid annuities for fixed terms and then transferred their remainders to another trust with generation-skipping transfer potential. The taxpayer intended that no GST exemption be allocated, but the accounting firm omitted the first transfer from Form 709 and failed to elect out when the four other trusts' estate-tax inclusion periods ended. No GST-tax-triggering event had occurred for any of the trusts. The IRS granted 120 days to file supplemental Forms 709 electing out of automatic GST exemption allocation for the transfers to all five trusts.

Ruling snapshot

• Question: Could the taxpayer make late elections out of automatic GST exemption allocation for one power-of-appointment transfer and four annuity-trust transfers?
• Outcome: Approved, with 120 days to file supplemental Forms 709 for the transfer year and the estate-tax inclusion period closing year.
• Key authorities: IRC §§ 2513, 2632(c), 2642(f), and 2642(g); Treas. Reg. §§ 26.2632-1, 26.2652-1, and 301.9100-3; Notice 2001-50

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201929005                                              Third Party Communication: None
Release Date: 7/19/2019                                        Date of Communication: Not Applicable
Index Number: 2632.00-00, 2632.01-00,
              2642.00-00, 9100.00-00                           Person To Contact:
                                                               ------------------------, ID No. --------------
---------------------------------                              Telephone Number:
------------------------------                                 ----------------------
-------------------------------------------                    Refer Reply To:
                                                               CC:PSI:04
                                                               PLR-123432-18
In Re: ---------------------------                             Date:
                                                               April 03, 2019




LEGEND:

Taxpayer                   =        ---------------------------
                           --------------------------------------
Spouse                     =        ---------------------------
                           ----------------------------------------------
Parent                     =        -----------------------------
Child                      =        -------------------------------
x                          =        -------------------
Trust A                    =        ---------------------------------------------------------------------------------
                           -------------------------------------------------------------------------
Trust 1                    =        --------------------------------------------------------------------------------------------
Trust 2                    =        -----------------------------------------------------
Trust 3                    =        ------------------------------------------------------------
Trust 4                    =        -------------------------------------------------------
Trust 5                    =        --------------------------------------------------------------
Trust 6                    =        --------------------------
Date 1                     =        ---------------------------
Date 2                     =        ---------------------------
Date 3                     =        ------------------------
Date 4                     =        ------------------------
Date 5                     =        -----------------------
Date 6                     =        ---------------------------
Date 7                     =        -----------------------
Date 8                     =        ---------------------------
Year 1                     =        -------
Year 2                     =        -------
Year 3                     =        -------

PLR-123432-18                                        2

Attorney                 =     -----------------------------------
Accounting Firm          =     ----------------------------------------------

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

This letter responds to your authorized representative’s letter of July 13, 2018, and
subsequent correspondence, requesting an extension of time under § 2642(g) of the
Internal Revenue Code and § 301.9100 of the Procedure and Administration
Regulations to elect out under § 2632(c)(5) of the automatic allocation of generation-
skipping transfer (GST) tax exemption.

Facts

The facts submitted and the representations made are as follows:

On Date 1, Parent created Trust A for the benefit of Taxpayer. Article V of Trust A
provides that Taxpayer shall have the testamentary power to appoint part or all of
Trust A property to the creditors of Taxpayer’s estate. Article IV, Paragraph 4.b. grants
Taxpayer the power, exercisable during life or by will, to appoint Trust A property for the
benefit of Taxpayer’s children born after Date 2.

On Date 3, a date after December 31, 2000, Taxpayer created Trust 1, a trust having
GST tax potential. In the same year, on Date 4, Taxpayer exercised the limited power
provided in Article IV, Paragraph 4.b. of Trust A by directing that the amount of $x be
transferred to and held as part of Trust 1’s principal. By virtue of the existence of
Taxpayer’s general testamentary power to appoint Trust A property, Taxpayer’s
exercise of the limited power on Date 4 resulted in a taxable gift of $x in Year 2.

On Date 5 in Year 1, also a date after December 31, 2000, Taxpayer created and
funded Trust 2 and Trust 3, both irrevocable trusts. In the same year, on Date 6,
Taxpayer created and funded Trust 4 and Trust 5, also irrevocable trusts. Each of
Trusts 2 through 5 provide for the payment to Taxpayer of an annuity for a term of years
and, upon the earlier of the expiration of such term or Taxpayer’s death, for the payment
of the remainder to Trust 6. Trust 6 has GST tax potential. Taxpayer survived the term
in Trusts 2 through 5. For GST tax purposes, the estate tax inclusion period (ETIP),
with respect to Trust 2 and Trust 3, closed on Date 7 of Year 3 and, with respect to
Trust 4 and Trust 5, closed on Date 8 of Year 3.

Attorney provided Taxpayer with legal and tax advice in connection with the creation
and funding of Trusts 1 through 5. Accounting Firm was retained to prepare any
necessary Forms 709, United States Gift (and Generation-Skipping Transfer) Tax
Return. In joint discussions with Attorney and members of Accounting Firm, Taxpayer
was advised of the potential GST tax implications of the transfers. With respect to
Trust 1, Taxpayer determined that Trust 1 would primarily benefit Child and directed that

PLR-123432-18                                 3


no GST tax exemption was to be allocated to Trust 1. Similarly, with respect to Trusts 2
through 5, Taxpayer determined that Trusts 2 through 5 would primarily benefit
Taxpayer, Spouse, and children of Taxpayer and Spouse and directed that no GST tax
exemption was to be allocated to Trusts 2 through 5.

For Year 2, Accounting Firm prepared, and Taxpayer and Spouse timely filed,
Forms 709 reporting gift transfers not the subject of this ruling request. On these
Forms 709, Taxpayer and Spouse consented to treat gifts as made one-half by each
under § 2513. However, in preparing the Year 2 Forms 709, Accounting Firm failed to
report the transfer to Trust 1 that resulted from Taxpayer’s exercise of the power of
appointment provided in Trust A and failed to elect out of the automatic allocation of
GST tax exemption to Trust 1 under § 2632(c)(5)(A)(i).

Further in preparing Taxpayer’s Year 3 Form 709, Accounting Firm failed to elect out of
the automatic allocation of GST tax exemption under § 2632(c)(5)(A)(i) as of the close
of the ETIPs with respect to the Year 1 transfers to Trusts 2 through 5.

Taxpayer represents that, to date, no taxable distributions, taxable terminations, or any
other events have occurred with respect to any of the trusts that would result in a GST
tax liability on the part of any of the trusts or their beneficiaries.

Taxpayer requests an extension of time under § 2642(g) and § 301.9100-3 to elect out
of the automatic allocation of GST tax exemption under § 2632(c)(5)(A)(i) with respect
to the $x transfer to Trust 1. Taxpayer further requests an extension of time under
§ 2642(g) and § 301.9100-3 to elect out of the automatic allocation of GST tax
exemption under § 2632(c)(5)(A)(i) with respect to the Year 1 transfers to Trusts 2
through 5.

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 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.

PLR-123432-18                                 4


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(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 shall be
allocated to the property transferred to the extent necessary to make the inclusion ratio
for such property zero.

Section 2632(c)(3)(A) provides that 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.

Section 2632(c)(4) provides that for purposes of § 2632(c), an indirect skip to which
§ 2642(f) applies shall be deemed to have been made only at the close of the ETIP.
The fair market value of such transfer shall be the fair market value of the trust property
at the close of the ETIP.

Section 2632(c)(5)(A)(i) provides that an individual may elect to have § 2632(c) not
apply to an indirect skip or any or all transfers made by such individual to a particular
trust.

Section 26.2632-1(b)(2)(iii)(A) of the Generation-Skipping Transfer Tax Regulations
provides that a transferor may prevent the automatic allocation of GST exemption (elect
out) with respect to: (1) one or more prior-year transfers subject to § 2642(f) (regarding
ETIPs) made by the transferor to a specified trust or trusts; (2) one or more (or all)
current-year transfers made by the transferor to a specified trust or trusts; (3) one or
more (or all) future transfers made by the transferor to a specified trust or trusts; and
(4) all future transfers made by the transferor to all trusts (whether or not in existence at
the time of the election out).

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. Prior-year transfers
that are subject to § 2642(f), and to which the election out is to apply, must be
specifically described or otherwise identified in the election out statement.

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

PLR-123432-18                                5

all other elections out, the first transfer to be covered by the election out was made.
Section 2513(a)(1) provides that a gift made by one spouse to any person other than his
spouse shall 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 2513(a)(1) only applies if both spouses have signified their consent to the
application of this section in the case of all such gifts made during the calendar year by
either while married to the other.

Section 2652(a)(2) provides that if, under § 2513, one-half of a gift is treated as made
by an individual and one-half of such gift is treated as made by the spouse of such
individual, such gift shall be so treated for purposes of chapter 13. Under § 26.2652-
1(a)(4), in the case of a transfer with respect to which the donor’s spouse makes an
election under § 2513 to treat the gift as made one-half by the spouse, the electing
spouse is treated as the transferor of one-half of the entire value of the property
transferred by the donor, regardless of the interest the electing spouse is actually
deemed to have transferred under § 2513. The donor is treated as the transferor of
one-half of the value of the entire property.

Section 2642(b)(1)(A) provides that, except as provided in § 2642(f), if the allocation of
the GST exemption to any transfers of property is made on a gift tax return filed on or
before the date prescribed by § 6075(b) for such transfer or is deemed to be made
under § 2632(b)(1) or (c)(1), 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)), or, in the case of an allocation deemed to have been made at the close of
an ETIP, its value at the time of the close of the ETIP.

Section 2642(f)(1) provides that for purposes of determining the inclusion ratio, if an
individual makes an inter vivos transfer of property, and the value of such property
would be includible in the gross estate of such individual under chapter 11 if such
individual died immediately after making such transfer (other than by reason of § 2035),
any allocation of GST exemption to such property shall not be made before the close of
the ETIP (and the value of such property shall be determined under § 2642(f)(2)). If
such transfer is a direct skip, such skip shall be treated as occurring as of the close of
the ETIP.

Section 2642(f)(3) provides that for purposes of § 2642(f), the term “estate tax inclusion
period” means any period after the transfer described in paragraph (1) during which the
value of the property involved in such transfer would be includible in the gross estate of
the transferor under chapter 11 if he died.

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).

PLR-123432-18                                 6


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.

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 Internal Revenue
Code except subtitles E, G, H, and I.

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). Under § 301.9100-1(b), a regulatory election
includes an election whose due date is prescribed by a notice published in the Internal
Revenue Bulletin. 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.

Under § 301.9100-3(b)(1)(v), 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 upon the facts submitted and representations made, we conclude that the
requirements of § 301.9100-3 are satisfied. Therefore, Taxpayer is granted an
extension of time of 120 days from the date of this letter to file supplemental Forms 709
to elect out under § 2632(c)(5)(A)(i) of the automatic allocation rules of § 2632(c)(1) for

PLR-123432-18                                  7

the transfers to Trusts 1 through 5. With respect to the $x transfer to Trust 1, Taxpayer
should make the election on a supplemental Form 709 for Year 2 and with respect to
the Year 1 transfers to Trusts 2 through 5, Taxpayer should make the election on a
supplemental Form 709 for the year in which the ETIP closes, Year 3. The forms
should be filed with the Internal Revenue Service Center, 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 specifically ruled herein, we express no opinion on the federal tax
consequences of the transaction under the cited provisions or under any other
provisions of the Code, including whether the retained annuity interest is a qualified
annuity interest under § 2702.

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

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) of the Code
provides that it may not be used or cited as precedent.

                                       Sincerely,

                                       Associate Chief Counsel
                                       (Passthroughs & Special Industries)



                                    By: Karlene M. Lesho
                                       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


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