A misreported gift still triggered automatic allocation of the donor's generation-skipping tax exemption

Plain-English summary

The generation-skipping transfer (GST) tax applies when wealth passes to
grandchildren or later generations, and each person has a GST exemption that can
shelter such transfers. For gifts to certain long-term family trusts (called "GST
trusts"), the tax law automatically applies the donor's exemption unless the donor
formally elects out. Here a donor gave partnership units to a family trust but
reported the gift in the wrong place on her gift tax return (Form 709) and did not
show the automatic GST allocation. She asked the IRS to confirm the exemption was
still automatically allocated. The IRS agreed: the trust qualified as a GST trust
(a contingent power of appointment held by the children did not disqualify it),
and because she never attached a formal "election out" statement, the misreporting
did not undo the automatic allocation. So the donor's GST exemption applied to the
transfer, giving the trust a zero inclusion ratio (fully exempt from GST tax).

Ruling snapshot

• Question: Was the donor's GST exemption automatically allocated to her
  transfer to the family trust under Section 2632(c), despite the transfer being
  misreported on Form 709?
• Outcome: Approved (ruled the exemption was automatically allocated)
• Key authorities: IRC §§ 2632(c), 2631, 2642; Treas. Reg. § 26.2632-1(b)(2)

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202210010                                              Third Party Communication: None
 Release Date: 3/11/2022                                        Date of Communication: Not Applicable
 Index Number: 2632.02-00
                                                                Person To Contact:
 --------------------------                                     ------------------------, ID No. ------------------
 --------------------------------                               Telephone Number:
 ---------------------------                                    --------------------
 -----------------------------------                            Refer Reply To:
                                                             CC:PSI:B04
 In Re: ---------------------------------------------------- PLR-113643-21
 --------------------------------------------                Date:
                                                             December 13, 2021



Legend

Date 1                          =          -------------------
Year                            =          -------
Date 2                          =          ------------------
Donor                           =          --------------------------------------------------
Trust                           =           ---------------------------------------------------------
--------------------------------------------------------------------------------------
x                               =          -----
LP                              =          -------------------------------------------------

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

       This letter responds to your authorized representative's letter dated June 14,
2021, requesting a ruling that the automatic allocation rules under § 2632(c) of the
Internal Revenue Code (Code) apply to the transfers made by Settlor and Spouse in
Year.

FACTS

         The facts submitted and the representations made are as follows:

       On Date 1, in Year (a date after December 31, 2000), Donor established an
irrevocable trust, Trust, for the benefit of her descendants. During Donor's lifetime, the
trustee may distribute the income and principal of Trust to Donor's descendants in the
trustee's sole discretion to provide for health, education, maintenance and support.
Upon Donor's death, Trust divides into separate shares each benefitting one of Donor's
children and his or her descendants. During each child's life, the trustee may distribute
PLR-113643-21                                2

principal and income in his sole discretion to such child and his or her descendants to
provide for health, education, maintenance and support.

        Each child may at his or her death appoint the remainder of his or her separate
trust to any person or entity other than the child's estate, the child's creditors or the
creditors of the child's estate. Additionally, each child may also appoint to the creditors
of his or her estate an amount of the trust having a value equal to the greatest dollar
amount which produces the lowest sum of (i) wealth transfer taxes payable with respect
to such child's estate, and (ii) generation-skipping transfer tax payable with respect to
Trust. Any unappointed assets of a child's separate trust will continue in trust for the
benefit of his or her descendants.

       On Date 2, in Year, Donor transferred x non-voting partnership units in LP, a
limited partnership, to Trust. Donor reported the Date 2 transfers to Trust on her Year
Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. However,
the Date 2 transfer to Trust was incorrectly reported on Form 709, Schedule A, Part 1-
Gifts Subject Only to Gift Tax instead of on Schedule A, Part 3-Indirect Skips.
Furthermore, the automatic allocation of the GST exemption was not reported on
Schedule D, Computation of Generation-Skipping Transfer Tax.

     You request a ruling that Donor's Generation-Skipping Transfer (GST) tax
exemption was automatically allocated to the Date 2 transfer to Trust under the
automatic allocation rules of § 2632(c).

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 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) provides the method for determining the inclusion ratio.

       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) provides that any allocation by an individual of his 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.
PLR-113643-21                                 3


        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.

       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)(3)(B) provides, in relevant part, that the term "GST trust"
means a trust that could have a generation-skipping transfer with respect to the
transferor unless the trust falls within any of six enumerated exceptions.

        Section 2632(c)(3)(B)(ii) provides that a trust is not a GST trust if the trust
instrument provides that more than 25 percent of the trust corpus must be distributed to
or may be withdrawn by one or more individuals who are non-skip persons and who are
living on the date of death of another person identified in the instrument (by name or by
class) who is more than 10 years older than such individuals.

       Section 2632(c)(3)(B)(iii) provides that a trust is not a GST trust if the trust
instrument provides that, if one or more individuals who are non-skip persons die on or
before a date or event described in clause (i) or (ii), more than 25 percent of the trust
corpus either must be distributed to the estate or estates of one or more of such
individuals or is subject to a general power of appointment exercisable by one or more
of such individuals.

       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 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).

       Section 26.2632-1(b)(2)(iii)(B) provides that an election out of automatic
allocation of GST exemption is made by attaching an election out statement to a timely
filed Form 709.

       In this case, more than 25 percent of the principal of Trust would be subject to a
general power of appointment held by the children and exercisable by them upon their
deaths if GST exemption is not allocated to more than 25 percent of Trust.
Nevertheless, the general power of appointment contingent upon the inclusion ratio of
the trust does not in this case prevent the trust from being a GST trust under
§ 2632(c)(3)(B). Accordingly, the terms of Trust satisfy the definition of a GST trust
under § 2632(c)(3)(B) at the time of the Date 2 transfer to Trust.

       Additionally, Donor's failure to correctly report the Date 2 transfers on her Year
PLR-113643-21                                  4

Form 709 did not constitute an election out of the automatic allocation rules under
§ 26.2632-1(b)(2)(iii), because no election out statement was attached to Donor's Year
Form 709. Therefore, Donor's Date 2 transfer to Trust satisfies the definition of an
indirect skip under § 2632(c)(1). Accordingly, based upon the facts submitted and the
representations made, we conclude that Donor's available GST exemption was
automatically allocated to the Date 2 transfer to Trust.

       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 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 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.


                                           Sincerely,




                                           Leslie H. Finlow
                                           Senior Technician Reviewer, Branch 4
                                           Office of the Associate Chief Counsel
                                           (Passthroughs & Special Industries)


Enclosure:
      Copy for § 6110 purposes



cc: