IRS grants late election out of automatic GST exemption allocation

Plain-English summary

A taxpayer created a grantor retained annuity trust whose remaining property later passed to a family trust with generation-skipping transfer potential. The taxpayer's attorney failed to explain that GST exemption would be allocated automatically when the estate tax inclusion period ended or that the taxpayer could elect out on Form 709. As a result, exemption was automatically allocated contrary to the taxpayer's intent. The IRS found that the taxpayer reasonably relied on a qualified tax professional and satisfied the standards for regulatory relief. It granted 120 days to file an election under IRC § 2632(c)(5) preventing the automatic allocation from applying to the transfer.

Ruling snapshot

• Question: Could the taxpayer make a late election out of automatic GST exemption allocation to the GRAT transfer?
• Outcome: Approved
• Key authorities: IRC §§ 2632(c)(5) and 2642(g); Treas. Reg. §§ 26.2632-1 and 301.9100-3; Notice 2001-50

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

Number: 202107001                                               Third Party Communication: None
Release Date: 2/19/2021                                         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:B04
                                                                PLR-100294-20
                                                                Date:
                                                                June 30, 2020

In Re: ----------------------------------------------------
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Legend

Taxpayer                   =        -------------------------
                                    -------------------------------------------
Spouse                     =        ----------------------------
                                    -------------------------------------------
Date 1                     =        -------------------------
Date 2                     =        -------------------------
Year 1                     =        -------
Year 2                     =        -------
Family Trust               =        ------------------------------------------------------
                                    -----------------------
Trust 1                    =        ---------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
Trust 2                    =        ---------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Attorney                   =        ---------------
Entity                     =        -------------------------------
x                          =        -----------

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

This letter responds to your personal representative’s letter of November 14, 2019, and
subsequent correspondence, requesting an extension of time under § 2642(g) of the
Internal Revenue Code (Code) and § 301.9100-1 and § 301.9100-3 of the Procedure
and Administration Regulations to make an election under § 2632(c)(5) to elect out of
the generation-skipping transfer (GST) exemption automatic allocation rules with
respect to certain transfers to trusts.

The facts and representations submitted are as follows:

On Date 1, a date after December 31, 2000, in Year 1, Taxpayer and Spouse
established Family Trust, an irrevocable trust, for the benefit of their issue. Family
Trust has GST Tax potential.

Also on Date 1 in Year 1, Taxpayer established Trust 1, an irrevocable grantor retained
annuity trust (GRAT). Taxpayer funded Trust 1 with x limited partnership units of Entity.
Under the terms of Trust 1, Taxpayer’s retained interest terminated and the remaining
principal of Trust 1 passed to Family Trust on Date 2 in Year 2. Thus, for GST tax
purposes, the estate tax inclusion period (ETIP) with respect to the transfer to Trust 1
closed on Date 2 in Year 2.

Family Trust was created for the primary benefit of the children of Taxpayer and
Spouse. Taxpayer did not intend for the trust to later provide benefits for potential
grandchildren. Family Trust was established to be the recipient of any assets remaining
in Trust 1, as well as any assets remaining in Trust 2, a GRAT created by Spouse,
following the end of the terms of the retained annuity period of each GRAT. Beyond the
distributions from Trust 1 and Trust 2, no contributions have been made to Family Trust.

Attorney provided Taxpayer and Spouse with legal and tax advice in connection with the
creation and establishment of Family Trust and Trust 1 and Trust 2. Attorney failed to
advise Taxpayer and 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) on a Form 709, United States
Gift (and Generation-Skipping Transfer) Tax Return. As a result, Taxpayer failed to
make an election on a Year 2 (or any earlier) Form 709 to opt out of the automatic
allocation of GST exemption to the transfer to Trust 1. Similarly, Spouse failed to make
an election on Form 709 to opt out of the automatic allocation of GST exemption to
Spouse’s transfer to Trust 2.

GST exemption was automatically allocated to Taxpayer’s transfer to Trust 1 at the
expiration of the ETIP on Date 2 in Year 2 as a result of the failure to make an election
under § 2632(c)(5) to opt out of the automatic allocation of GST exemption for the
transfer.

Taxpayer requests an extension of time under § 2642(g) and § 301.9100-3 to elect
under § 2632(c)(5) to have the automatic allocation of GST exemption not apply to
Taxpayer’s transfer to Trust 1.

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 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 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)(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, in part, 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 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 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 § 2642(f)(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 26.2632-1(b)(2)(i) of the Generation-Skipping Transfer Tax Regulations
provides that, in the case of an indirect skip made after December 31, 2000, to which
§ 2642(f) (relating to transfers subject to the estate tax inclusion period or ETIP) does
not apply, the transferor's unused GST exemption is automatically allocated to the
property transferred (but not in excess of the fair market value of the property on the
date of the transfer). This automatic allocation is effective whether or not a Form 709 is
filed reporting the transfer, and is effective as of the date of the transfer to which it
relates. An automatic allocation is irrevocable after the due date of the Form 709 for the
calendar year in which the transfer is made.

Section 26.2632-1(b)(2)(ii) provides that, except as otherwise provided, the transferor
may prevent the automatic allocation of GST exemption with regard to an indirect skip
by making an election as provided in § 26.2632-1(b)(2)(iii).

Section 26.2632-1(b)(2)(iii)(A) provides, in relevant part, that a transferor may prevent
(1) 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, and
(2) the automatic allocation of GST exemption (elect out) with respect to all future
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 26.2632-1(c)(1)(i) provides that a direct skip or an indirect skip that is subject to
an ETIP is deemed to have been made only at the close of the ETIP. The transferor
may prevent the automatic allocation of GST exemption to a direct skip or an indirect
skip by electing out of the automatic allocation rules at any time prior to the due date of
the Form 709 for the calendar year in which the close of the ETIP occurs (whether or
not any transfer was made in the calendar year for which the Form 709 was filed, and
whether or not a Form 709 otherwise would be required to be filed for that year).

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.

Under § 301.9100-1(c), 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 six 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 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,
a taxpayer 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 representations made, we conclude that the
requirements of § 301.9100-3 have been satisfied. Accordingly, Taxpayer 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 Taxpayer’s transfer to
Trust 1. The election should be filed with the Internal Revenue Service Center, at the
following address: Department of the Treasury, Internal Revenue Service Center,
Kansas City, MO 64999. A copy of this letter should be attached to the Form 709.

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.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayers 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.

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

                                                    Sincerely,

                                                    Associate Chief Counsel
                                                    Passthroughs and Special Industries




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

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

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