Estate receives more time to allocate GST exemption to child trusts

Plain-English summary

A married couple's trust divided after the husband's death into survivor, credit-shelter, and marital trusts. The husband's estate made a QTIP election for the marital trust but did not make a reverse QTIP election, so the wife became the generation-skipping transfer tax transferor of the marital trust and was also the transferor of the survivor's trust. After the wife's death, those trusts divided into exempt and non-exempt trusts for the children, but the accounting firm omitted Schedule R from her timely estate tax return. The IRS found that the estate satisfied the late-allocation standards and granted 120 days to allocate the wife's GST exemption to the children's exempt trusts. The allocations will be effective at the wife's death and will use the values determined for federal estate tax purposes.

Ruling snapshot

• Question: Should the wife's estate receive extra time to allocate her GST exemption to the children's exempt trusts?
• Outcome: Approved: the estate received 120 days to make the allocations on a supplemental Form 706.
• Key authorities: IRC §§ 2044, 2631, 2632, 2642, and 2652; 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: 202116006 Third Party Communication: None
Release Date: 4/23/2021 Date of Communication: Not Applicable
Index Number: 2632.03-00, 2642.00-00,
2652.01-00, 9100.00-00 Person To Contact:
---------------------, ID No. ----------
------------------------------ ------------------------------ Telephone Number:
--------------------------------------------------------- -------------------
---------------------------- Refer Reply To:
------------------------------------ CC:PSI:B4
PLR-107698-20
In Re: -------------------------------------- Date:
August 26, 2020

Legend

Husband = -------------------------

Wife = ----------------------------------------------------

Trust = --------------------------------------

Date 1 = --------------------------

Date 2 = ------------------

Date 3 = ------------------

Date 4 = --------------------

Date 5 = -------------------

X = ----------------

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

Attorney = ---------------------------------

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

This letter responds to your authorized representative’s letter dated March 12,2020, and
subsequent correspondence, requesting an extension of time under § 2642(g) of the
PLR-107698-20 2

Internal Revenue Code and § 301.9100-3 of the Procedure and Administration
Regulations to allocate Wife’s GST exemption to certain trusts.

Facts

The facts and representations submitted are summarized as follows:

On Date 1, Husband and Wife established Trust for the benefit of the surviving spouse
and their children and more remote descendants. Husband and Wife subsequently
amended the Trust on Dates 2 and Date 3. Husband died on Date 4. Pursuant to the
terms of Trust, the trustee of Trust divided Trust into two separate trusts designated as
the Survivor’s Trust and the Residual Trust, and further divided the Residual Trust into
two separate trusts designated as the Credit Shelter Trust and the Marital Trust. A
QTIP election was made on Husband’s Form 706, Estate (and Generation Skipping
Transfer) Tax Return with respect to the Marital Trust, but no reverse QTIP election was
made. Accordingly, Husband’s GST exemption was not allocated to Marital Trust.

Wife died on Date 5. Wife was survived by her three children and three grandchildren.
Wife’s remaining GST exemption was $x, and the value of assets in the Marital Trust
and Survivor’s Trust exceeded $x. Thus, pursuant to the terms of Trust, Marital Trust
and Survivor’s Trust were divided into separate exempt and non-exempt trusts: Child’s
Exempt Trusts and Child’s Non-Exempt Trusts, to benefit Wife and each respective
child and that child’s issue.

The trustees instructed Accounting Firm to prepare a Form 706 for Wife’s estate. The
Form 706 was timely filed on extension. However, Accounting Firm failed to prepare
and include a Schedule R (Generation-Skipping Transfer Tax) with the Form 706.
Accordingly, Wife’s GST exemption was not affirmatively allocated to Child’s Exempt
Trusts on the Form 706. The error was discovered when Attorney requested a copy of,
and reviewed, Wife’s Form 706.

Ruling Requested:

Wife’s estate requests an extension of time to allocate Wife’s GST exemption to the
Child’s Exempt Trusts and the value of the transfers as determined for federal estate tax
purposes will be used in determining the amount of GST exemption to be allocated to
the trusts.

Law and Analysis:

Section 2001(a) imposes a tax on the transfer of the taxable estate of every decedent
who is a citizen or resident of the United States.

Section 2044(a) provides that the value of the gross estate shall include the value of
any property in which the decedent had a qualifying income interest for life.
PLR-107698-20 3

Section 2044(b) provides that § 2044(a) applies to any property if a deduction was
allowed with respect to the transfer of such property to the decedent under § 2057(b)(7)
and § 2519 did not apply with respect to a disposition by the decedent of part or all of
such property.

Section 2601 imposes a tax on every generation-skipping transfer. A generation-
skipping transfer is defined under § 2011(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 determined by multiplying the
taxable amount by the applicable rate. Section 2641(a) provides that the term
“applicable rate” means with respect to any GST transfer, the product of the maximum
federal 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 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 under § 2631 allocated to the trust (or to
property transferred in a direct skip), and the denominator is the value of the property
transferred to the trust or involved in the direct skip.

Section 2631(a), as in effect on Date 5, 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
the individual is the transferor. Section 2631(b) provides that any allocation under
§ 2631(a), once made, shall be 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(d)(1) of the Generation-Skipping Transfer Tax Regulations provides
that an allocation of a decedent’s unused GST exemption by the executor of the
decedent’s estate is to be made on the appropriate United States Estate (and
Generation-Skipping Transfer) Tax Return (Form 706) filed on or before the date
prescribed for filing the return (including extensions).

Section 2652(a)(1)(A) provides, in part, that the term “transferor” means in the case of
any property subject to the tax imposed by chapter 11, the decedent. An individual shall
be treated as transferring any property with respect to which such individual is the
transferor.

Section 26.2652-1(a)(1) provides that a surviving spouse is the transferor of a qualified
domestic trusts created by the deceased spouse that is included in the surviving
PLR-107698-20 4

spouse’s gross estate, provided the trust is not subject to the election described in
§ 26.2652-2 (reverse QTIP election).

Section 2642(b)(2)(B) provides that any allocation of GST exemption to property
transferred as a result of the death of the transferor is effective on and after the date of
death of the transferor.

Section 2642(g)(1) 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
this paragraph.

Section 2642(g)(1)(B) provides that in determining whether to grant relief under this
paragraph, 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 under this paragraph, 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, 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) under the provisions of
§ 301.9100-3.

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 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.

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 the grant of relief will not prejudice the interests of the
government.
PLR-107698-20 5

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.

In this case, the executors of Husband’s estate did not make a reverse QTIP election
with respect to Marital Trust on Husband’s Form 706. Therefore, under §§ 2044
and 26.2652-1(a)(1), Wife is deemed to be the transferor of the Marital Trust for GST
purposes. In addition, Wife is the transferor of the Survivor’s Trust. Pursuant to Trust,
these trusts were divided into Child’s Exempt Trusts and Child’s Non-Exempt Trusts.

Based on the facts submitted and the representations made, we conclude that the
requirements of § 301.9100-3 have been satisfied. Accordingly, the executors of Wife’s
estate is granted an extension of time until 120 days after the date of this letter to
allocate Wife’s GST exemption to Child’s Exempt Trusts. The allocations will be
effective as of Wife’s date of death and the value of the transfers as determined for
federal estate tax purposes will be used in determining the amount of GST exemption to
be allocated to the trusts.

The allocations should be made on a supplemental Form 706. The supplemental Form
706 should be filed with the Department of the Treasury, Internal Revenue Service,
Attn: E&G, Stop 824G, 7940 Kentucky Drive, Florence, KY 41042-2915. A copy of this
letter should be attached to the supplemental Form 706. A copy is enclosed for this
purpose.

The ruling contained in this letter is 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.

Except as specifically ruled herein, we express or imply no opinion on the federal tax
consequences of the transaction under the cited provisions or under any other
provisions of the Code.

In accordance with the power of attorney on file with this office, we are sending copies
of this letter to your authorized representative.
PLR-107698-20 6

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,

                                  Associate Chief Counsel
                                  (Passthroughs & Special Industries)

                                  Lorraine Gardner

                             By: _____________________________
                                 Lorraine Gardner
                                 Senior Counsel, Branch 4
                                 Office of the Associate Chief Counsel
                                 (Passthroughs & Special Industries)

Enclosures (2)

Copy of this letter
Copy for § 6110 purposes

cc: