Spouses receive 120 days to elect out of automatic GST allocations for four GRAT transfers

Plain-English summary

A husband created and funded four grantor retained annuity trusts whose remainder interests passed to continuing trusts with generation-skipping transfer tax potential. The couple's accountant and trusts-and-estates attorney failed to advise them that GST exemption would be allocated automatically when the applicable estate tax inclusion periods closed unless they elected out. The spouses therefore missed elections for transfers made in several years. The IRS found that their reliance on qualified tax professionals satisfied the standards for late relief. It granted 120 days to make the elections, with the wife's relief conditioned on both spouses consenting to gift splitting for two of the transfer years.

Ruling snapshot

• Question: Could the spouses make late elections preventing automatic GST exemption allocations to transfers involving four GRATs?
• Outcome: Approved for 120 days, subject to the stated gift-splitting consent condition.
• Key authorities: IRC §§ 2513, 2632(c)(5), 2642(f), 2642(g); Treas. Reg. §§ 26.2632-1, 301.9100-3; Notice 2001-50

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202134006 Third Party Communication: None
Release Date: 8/27/2021 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:4
PLR-122795-20
Date:
RE: -------------------------------- April 02, 2021

Legend

Husband = ---------------------------------------------------------------------------------------
-----------
Wife = ---------------------------------------------------------------------------------------
---------------
Children = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------------------
GRAT 1 = ---------------------------------------------------------------------------------------
-------------------------
GRAT 1 = ---------------------------------------------------------------------------------------
Continuing ---------------------------------------------------------------------------------------
Trusts ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
--------------------------------------------------------------------
GRAT 2 = ---------------------------------------------------------------------------------------
--------------------------
GRAT 2 = ---------------------------------------------------------------------------------------
Continuing ---------------------------------------------------------------------------------------
Trusts ---------------------------------------------------------------------------------------

PLR-122795-20 2

                      ---------------------------------------------------------------------------------------
                      ---------------------------------------------------------------------------------------
                      ---------------------------------------------------------------------------------------
                      ---------------------------------------------------------------------------------------
                      ---------------------------------------------------------------------------------------
                      -------------------------------------------------------------

GRAT 3 = ---------------------------------------------------------------------------------------
--------------------------
GRAT 4 = ---------------------------------------------------------------------------------------
-------------------------
Date 1 = ------------
Date 2 = ---------------
Date 3 = ------------
Date 4 = ---------------
Date 5 = ---------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = -------
Year 5 = -------
Year 6 = -------
Year 7 = -------
a = --
Accountant = ------------------------
Attorney = ------------------

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

This letter responds to your authorized representative's letter dated June 4, 2020, and
subsequent correspondence, requesting an extension of time under § 2642(g) of the
Internal Revenue Code and § 301.9100-3 of the Procedure and Administration
Regulations to elect out of the generation-skipping transfer (GST) exemption automatic
allocation rules under § 2632(c) with respect to certain transfers to trusts.

The facts and representations submitted are as follows:

On Date 1 in Year 1 (a date before December 31, 2000), Husband established and
funded GRAT 1, an irrevocable trust. GRAT 1 provided for the payment of an annuity to
Husband for a term of years. Upon expiration of the term, GRAT 1 provided for
allocation of the remainder to subtrusts, one for the benefit of each of Husband’s a
oldest Children (GRAT 1 Continuing Trusts). GRAT 1 Continuing Trusts have GST
potential.

On Date 2 in Year 2 (a date before December 31, 2000), Husband established and
funded GRAT 2, an irrevocable trust. GRAT 2 provided for the payment of an annuity to

PLR-122795-20 3

Husband for a term of years. Upon expiration of the term, GRAT 2 provided for
allocation of the remainder to subtrusts, one for the benefit of each of Husband’s
Children (GRAT 2 Continuing Trusts). GRAT 2 Continuing Trusts have GST potential.

Husband and Wife (Taxpayers) filed Forms 709 (United States Gift (and Generation-
Skipping Transfer) Tax Return) for Year 1, signifying their consent to treat all of the gifts
occurring in Year 1 as having been made one-half by each of them under § 2513.
Taxpayers have not filed Forms 709 for Year 2 but represent that they will consent to
treat all of their gifts in Year 2 as having been made one-half by each of them under
§ 2513.

For GST tax purposes, the estate tax inclusion period (ETIP) closed on Date 3 of Year 3
with respect to GRAT 1 and on Date 4 of Year 4 with respect to GRAT 2. Date 3 of
Year 3 and Date 4 of Year 4 are dates after December 31, 2000. Taxpayers have not
filed Forms 709 for Year 3 but did file Forms 709 for Year 4.

On Date 5 in Year 5 (a date after December 31, 2000), Husband established GRAT 3
and GRAT 4, both irrevocable trusts, and funded them. GRAT 3 and GRAT 4 each
provided for the payment of an annuity to Husband for a term of years. Upon expiration
of the respective terms, GRAT 3 and GRAT 4 provided for distribution of the remainder
in unequal shares to GRAT 1 Continuing Trusts and GRAT 2 Continuing Trusts.

For GST tax purposes, the ETIP closed on Date 2 of Year 6 with respect to GRAT 3 and
on Date 2 of Year 7 with respect to GRAT 4. Taxpayers have not filed Forms 709 for
Year 5 but represent that they will consent to treat all of their gifts in Year 5 as having
been made one-half by each of them under § 2513. Taxpayers also have not filed
Forms 709 for Year 6 and Year 7.

Although Accountant served as Taxpayers’ accountant at the close of the ETIPs of
GRAT 1, GRAT 2, and GRAT 4, respectively, and Attorney served as Taxpayers’ trusts
and estates attorney at the close of the ETIP of GRAT 3, both Accountant and Attorney
failed to advise Taxpayers of the rules under § 2632(c) regarding the automatic
allocation of GST exemption and the ability to elect out of automatic allocation by
making an election under § 2632(c)(5). As a result, Taxpayers did not elect out of
automatic allocation for the transfers to GRAT 1, GRAT 2, GRAT 3, and GRAT 4.

Taxpayers request the following rulings:

1. An extension of time under § 2642(g) and § 301.9100-3 to elect out of the automatic
   allocation of GST exemption under § 2632(c)(5) for the Year 1 transfer to GRAT 1.

2. An extension of time under § 2642(g) and § 301.9100-3 to elect out of the automatic
   allocation of GST exemption under § 2632(c)(5) for the Year 2 transfer to GRAT 2.

PLR-122795-20 4

3. An extension of time under § 2642(g) and § 301.9100-3 to elect out of the automatic
   allocation of GST exemption under § 2632(c)(5)(A)(i)(I) for the Year 5 transfers to
   GRAT 3 and GRAT 4.

Law and Analysis

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.
Under § 2513(a)(2), paragraph (a)(1) only applies if both spouses have signified their
consent to the application of paragraph (a)(1) in the case of all such gifts made during
the calendar year by either while married to the other.

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 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.

Section 2632(a)(1) provides that any allocation by an individual of 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. 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.
Section 2632(c)(3)(B) provides, in part, that the term “GST trust” means a trust that
could have a generation-skipping transfer with respect to the transferor unless an
exception enumerated in § 2632(c)(3)(B)(i)-(vi) applies.

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.

PLR-122795-20 5

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)(I) provides that an individual may elect to have § 2632(c) not
apply to an indirect skip. Section 2632(c)(5)(B)(i) provides that an election under
§ 2632(c)(5)(A)(i)(I) shall be deemed to be timely if filed on a timely filed gift tax return
for the calendar year in which the transfer was deemed to have been made pursuant to
§ 2632(c)(4).

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 an 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. In the case of an indirect skip to which section 2642(f) does apply, the
indirect skip is deemed to be made at the close of the ETIP and the GST exemption is
deemed to be allocated at that time.

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
the automatic allocation of GST exemption (elect out) with respect to any transfer or
transfers constituting an indirect skip made to a trust or to one or more separate shares
that are treated as separate trusts under § 26.2654-1(a)(1). A transferor may elect out
with respect to one or more prior-year transfers subject to § 2642(f) (regarding ETIPs)
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 ETIP closes.

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

PLR-122795-20 6

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(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)).

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 election under § 2632(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 (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

PLR-122795-20 7

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,
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.

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 have been satisfied. Therefore, Husband and, subject to
Taxpayers signifying their consent to treat all of the gifts occurring in Year 2 and Year 5
as having been made one-half by each of them under § 2513, Wife are granted an
extension of time of 120 days from the date of this letter to elect out of the automatic
allocation rules under § 2632(c)(5)(A)(i)(I) with respect to the Year 1 transfer to GRAT 1,
the Year 2 transfer to GRAT 2, and the Year 5 transfers to GRAT 3 and GRAT 4.

Each election should be made on Forms 709 for the year in which the ETIP closed. The
Forms 709 for Year 2, Year 3, Year 5, Year 6, and Year 7 should be filed with the
Kansas City Service Center at the following address: Department of the Treasury,
Internal Revenue Service Center, Kansas City, MO 64999, and the supplemental
Forms 709 for Year 4 should be filed with the Internal Revenue Service Center at the
following address: Internal Revenue Service Center, Attn: E&G, Stop 824G, 7940
Kentucky Drive, Florence, KY 41042-2915. You should attach a copy of this letter to the
Forms 709 and supplemental Forms 709.

The rulings contained in this letter are based upon information and representations
submitted by 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.
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 taxpayers requesting it. Section 6110(k)(3) of the
Code provides that it may not be used or cited as precedent.

PLR-122795-20 8

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)



                                By: _/s/ Leslie H. Finlow
                                    Leslie H. Finlow
                                    Senior Technician Reviewer, Branch 4
                                    Office of the Associate Chief Counsel
                                    (Passthroughs and Special Industries)

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

cc: