Extra time granted to elect out of automatic GST exemption allocation on gifts to two trusts

Plain-English summary

A married taxpayer set up two irrevocable trusts, one for each child, and made gifts to them. Gifts to that kind of trust are automatically allocated part of the taxpayer's generation-skipping transfer (GST) tax exemption unless the taxpayer elects out. The taxpayer's accountant reported the gifts but never advised electing out, so the automatic allocation happened by default. A later accounting firm caught the mistake. The taxpayer asked for more time to make the election-out under § 2642(g) and the § 301.9100-3 relief rules. The IRS found the taxpayer acted reasonably and in good faith by relying on a tax professional, and granting relief would not harm the government. It gave the taxpayer 120 days to elect out by filing an amended Form 709 for the year of the gifts.

Ruling snapshot

• Question: May the taxpayer get extra time to elect out of the automatic GST exemption allocation for prior-year gifts to two trusts?
• Outcome: Approved, 120-day extension to file the election-out on an amended Form 709
• Key authorities: IRC §§ 2632(c)(5), 2642(g); Treas. Reg. § 301.9100-3; Notice 2001-50

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202428002 Third Party Communication: None
Release Date: 7/12/2024 Date of Communication: Not Applicable
Index Number: 2632.00-00, 2642.00-00,
9100.00-00 Person To Contact:
-------------------------- ID No. -----------------
-------------------------- -----------------------------------------------------
----------------------------- Telephone Number:
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-------------------------- Refer Reply To:
CC:PSI:B04
---------------------------------------- PLR-120372-23
Date:
April 09, 2024

Legend

Taxpayer = -----------------------------------------------------
Spouse = ---------------------------------------------------
Date 1 = ------------------
Date 2 = --------------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Trust 1 = ---------------------------------------------------------------------------------------
----------------------
Trust 2 = ----------------------------------------------------------------
-----------------------
Child 1 = ----------------------------------
Child 2 = --------------------------------
Accountant = --------------------------------
Accounting = ------------------------
Firm
a = ---
b = --

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

    This letter responds to your authorized representative’s letter dated October 11,

2023, and subsequent correspondence, requesting an extension of time under
§ 2642(g) of the Internal Revenue Code (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)(5) with respect to certain transfers
to a trust.
PLR-120372-23 2

   The facts and representations submitted are summarized as follows:

   On Date 1, Taxpayer and Taxpayer’s spouse, Spouse, established and funded

Trust 1, an irrevocable trust for the primary benefit of Child 1. Also on Date 1, Taxpayer
and Spouse established and funded Trust 2, an irrevocable trust for the primary benefit
of Child 2. Trust 1 and Trust 2 are identical, except for the identity of the beneficiaries.

    Each trust provides that the trustee is to pay to or apply for the benefit of the

primary beneficiary as much of the net income and principal as the trustee determines is
appropriate, in trustee’s absolute discretion. In addition, upon the primary beneficiary
reaching the age of a, the trustee is to pay or apply for the benefit of the primary
beneficiary, an annual unitrust amount equal to b percent of the net fair market value of
the sum of the primary beneficiary’s exempt and nonexempt trusts. Any net income not
distributed is to be accumulated and added to principal. On the death of the primary
beneficiary, any part of the trust that is not effectively appointed pursuant to powers of
appointment granted in the instrument is to be divided into shares for the benefit of
primary beneficiary’s issue by right of representation. Each trust has GST potential.

   During Year 1, Taxpayer transferred property to both Trust 1 and Trust 2.

Taxpayer retained Accountant to prepare his Year 1 Form 709, United States Gift (and
Generation-Skipping Transfer) Tax Returns. Accountant reported the transfers to
Trust 1 and Trust 2 on Taxpayer’s Form 709. However, Accountant failed to advise
Taxpayer to elect out of the automatic GST allocation pursuant to § 2632(c)(5)(A)(i).
Taxpayer timely filed Taxpayer’s Form 709 (with extensions) before Date 2.

   In Year 2, Taxpayer and Spouse engaged a new accounting firm, Accounting

Firm, to prepare their income and gift tax returns for Year 2 and Year 3. While
preparing Taxpayer’s Year 3 income tax return, Accounting Firm discovered that the
Year 1 Form 709 failed to elect out of the automatic GST allocation.

   Taxpayer requests 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) with
respect to Taxpayer’s Year 1 transfers to Trust 1 and Trust 2.

LAW AND ANALYSIS

   Section 2601 provides that a tax is imposed on every generation-skipping

transfer (GST). Section 2611(a) provides that the term "generation-skipping transfer"
means: (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 the applicable rate as the
product of the maximum federal estate tax rate and the inclusion ratio with respect to
the transfer.
PLR-120372-23 3

   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 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 GST with respect to the transferor unless an exception
listed in § 2632(c)(3)(B)(i)-(vi) applies.

    Section 2632(c)(5)(A)(i) provides, in relevant part, that an individual may elect to

have the automatic allocation rules of § 2632(c)(1) not apply to -- (I) an indirect skip, or
(II) any or all transfers made by such individual to a particular trust. Section
2632(c)(5)(B)(ii) provides, in relevant part, that the election under § 2632(c)(5)(A)(i)(II)
may be made on a timely-filed gift tax return for the calendar year for which the election
is to become effective.

    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: (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); or (5) any combination of (1) through (4).

    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.
PLR-120372-23 4

   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 generation-skipping transfer 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. Section 301.9100-1(a).

    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.

    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.
PLR-120372-23 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.

    Based upon the facts submitted and the 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 elect out of the
automatic allocation rules under § 2632(c)(5)(A)(i) for the transfers made during Year 1
to Trust 1 and Trust 2. The election should be made on an amended Form 709 for
Year 1. The amended Form 709 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 amended 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 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)

provides that it may not be used or cited as precedent.

                                Sincerely,

                                Associate Chief Counsel
                                Passthroughs and Special Industries


                                Daniel J. Gespass
                                ______________________________
                         By:    [Daniel J. Gespass]
                                Senior Technician Reviewer, Branch 4
                                Office of the Associate Chief Counsel
                                (Passthroughs and Special Industries)

PLR-120372-23 6

  Enclosure:
        Copy for § 6110 purposes

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