Taxpayer received time to opt out of GST allocation after GRAT term ended

Plain-English summary

A taxpayer created a grantor retained annuity trust, and when the retained interest ended the remaining property passed to a trust with generation-skipping transfer tax potential. That event closed the estate tax inclusion period and caused an indirect skip, triggering automatic allocation of the taxpayer's GST exemption. The taxpayer had intended not to allocate GST exemption, but the law and accounting firms did not explain either the automatic-allocation rule or the Form 709 election to opt out. No GST-tax-triggering distribution or termination had occurred when the error was discovered. The IRS found the discretionary relief requirements satisfied and granted 120 days to file Form 709 electing out of automatic allocation for the property transferred to the remainder trust.

Ruling snapshot

• Question: May the taxpayer make a late election out of automatic GST exemption allocation when the GRAT's estate tax inclusion period closed?
• Outcome: Approved, with 120 days to file the election on Form 709
• Key authorities: IRC §§ 2632(c)(4), 2632(c)(5), 2642(f), 2642(g); Treas. Reg. §§ 26.2632-1, 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202449004 Third Party Communication: None
Release Date: 12/6/2024 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-104873-24
In Re: --------------------------------------------------- Date:
---------------------------------- September 05, 2024

Legend

Taxpayer = ----------------
-------------------------
Trust = ---------------------------------------------------------------------------------
----------------------------------------------------
Remainder Trust = ---------------------------------------------------------------------------------
--------------------------------------------
Law Firm = ----------------------------
Accounting Firm = ------------------------------------------------
Attorney = ----------------------------------
Date = --------
Year 1 = -------
Year 2 = -------
Year 3 = -------

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

This letter responds to your authorized representative’s letter dated March 8, 2024, 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 under § 2632(c)(5) 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 of Year 1, a date after December 31, 2000, Taxpayer established and funded
Trust, an irrevocable grantor retained annuity trust (GRAT). Taxpayer’s retained
interest in Trust terminated on Date of Year 2, with the remaining principal transferred to
PLR-104873-24 2

Remainder Trust for the benefit of certain relatives and friends of Taxpayer. Remainder
Trust has GST potential. For GST tax purposes, the estate tax inclusion period (ETIP)
with respect to Taxpayer’s transfer to Trust closed on Date of Year 2, at which time an
indirect skip is deemed to have been made.

Taxpayer engaged Law Firm in connection with the formation of Trust. At the time of
Taxpayer’s Year 1 transfer to Trust, Taxpayer relied on Accounting Firm to prepare and
file Taxpayer’s tax returns. Taxpayer did not intend for any portion of Taxpayer’s GST
exemption to be allocated to property transferred to Remainder Trust. Law Firm and
Accounting Firm, however, did not advise Taxpayer that under § 2632(c), a portion of
Taxpayer’s GST exemption would be automatically allocated to the property transferred
to Remainder Trust. In addition, Law Firm and Accounting Firm did not advise
Taxpayer of the ability to elect out of the automatic allocation of GST exemption by
making an election under § 2632(c)(5) on Form 709 (United States Gift (and
Generation-Skipping Transfer) Tax Return). As a result, Taxpayer failed to make a
timely election on a Form 709 to opt out of the automatic allocation of GST exemption to
the property transferred to Remainder Trust. In Year 3, after Taxpayer’s GST
exemption was automatically allocated to the property transferred to Remainder Trust,
Attorney discovered the failure to opt out.

It has been represented that, to date, no taxable distributions, taxable terminations, or
any other events have occurred with respect to Trust or Remainder Trust that would
give rise to a GST tax liability.

RULING REQUESTED

Taxpayer requests an extension of time under § 2642(g) and § 301.9100-3 to elect
under § 2632(c)(5)(A)(i)(I) to have automatic allocation of GST exemption not apply to
the property transferred to Remainder Trust.

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 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 their 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.
PLR-104873-24 3

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 GST 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.
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 that an individual may elect to have § 2632(c) not
apply to: (I) an indirect skip or (II) any and all transfers made by such individual to a
particular trust.

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 made or deemed to have been made pursuant to § 2632(c)(4) or on
such later date or dates as may be prescribed by the Secretary.

Section 2632(c)(5)(B)(ii) provides that an 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)(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 § 2642(f) does apply, the
PLR-104873-24 4

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
(including indirect skips to which § 2642(f) may apply) 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 — (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; (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 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
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
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
PLR-104873-24 5

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” (ETIP) 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 the transferor died. The estate tax inclusion
period shall in no event extend beyond the earlier of (A) the date on which there is a
GST with respect to the property, or (B) the date of the death of the transferor.

Section 2642(g)(1)(A) 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
§ 2642(g).

Section 2642(g)(1)(B) provides that in determining whether to grant relief under
§ 2642(g), 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 § 2642(g), the time for making the allocation (or election) shall be
treated as if not expressly prescribed by statute.

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 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 due date is prescribed by a regulation (and
not expressly provided by statute). 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 that granting
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.
Under § 301.9100-3(g)(1), the procedures set forth in § 301.9100-3 do not apply to
requests for relief under § 2642(g)(1) that are filed on or after May 6, 2024, regardless
PLR-104873-24 6

of the date of the transfer. Since this ruling request was filed with the Internal Revenue
Service prior to May 6, 2024, the procedures set forth in § 301.9100-3 may still be
applied to grant relief under § 2642(g)(1). For requests for relief under § 2642(g)(1),
see § 26.2642-7.

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)(A)(i)(I) that the automatic allocation rules not apply to the property
transferred to Remainder Trust. The election should be made on a Year 2 or earlier
Form 709. The Form 709 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. You should attach a copy of this letter to Form 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 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.

                                       Sincerely,

                                       Associate Chief Counsel
                                       Passthroughs and Special Industries

                                              /s/
                                       _________________________
                                       Karlene M. Lesho
                                       Chief, Branch 4
                                       Office of the Associate Chief Counsel
                                       (Passthroughs and Special Industries)

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