Late relief to elect out of automatic GST exemption on eleven GRATs (companion ruling)

Plain-English summary

This is the companion ruling to PLR 202451010, addressing the other spouse in the same married couple. Here the taxpayer personally set up the children's trust and funded eleven grantor retained annuity trusts (GRATs) that would pass to the children's trust when the annuity terms ended. Because those transfers could later trigger generation-skipping transfer (GST) tax, the GST exemption is automatically applied unless the taxpayer affirmatively elects out. The couple intended to elect out and split their gifts, but the firm preparing their gift tax returns (Forms 709) never made the election-out. The taxpayer asked for more time under section 2642(g) and the § 301.9100-3 regulations. Because the request came before a May 6, 2024 rule change and the taxpayer reasonably relied on a professional who failed to act, the IRS granted 120 days to file amended Forms 709 making the election-out. No taxable GST events had occurred yet. This is the mirror-image relief that lets both spouses preserve their GST exemption after a preparer's oversight.

Ruling snapshot

• Question: Should the taxpayer get more time to elect out of the automatic allocation of GST exemption on transfers to eleven GRATs?
• Outcome: approved
• Key authorities: IRC §§ 2632(c)(5), 2642(g); Treas. Reg. §§ 26.2632-1, 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                    Department of the Treasury
                                                             Washington, DC 20224

 Number: 202451011                                           Third Party Communication: None
 Release Date: 12/20/2024                                    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:04
                                                             PLR-106086-24
          RE: -------------------                            Date:
                                                             September 25, 2024




LEGEND

Taxpayer          =        ----------------------------------------------
Spouse            =        ----------------------------------------------------
Date 1            =        -------------------------
Date 2            =        ------------------
Date 3            =        ----------------------
Date 4            =        --------------------------
Date 5            =        -----------------------
Date 6            =        ------------------
Date 7            =        -------------------------
Date 8            =        -------------------------
Date 9            =        ------------------
Date 10           =        ------------------
Date 11           =        ------------------
Date 12           =        --------------------------
Year 1            =        -------
Year 2            =        -------
Year 3            =        -------
Year 4            =        -------
Year 5            =        -------
Year 6            =        -------
Year 7            =        -------
Children’s Trust = ------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Trust 1           =        -------------------------------------------------------------------------------
Trust 2           =        --------------------------------------------------------------------------------
Trust 3           =        -------------------------------------------------------------------------------
Trust 4           =        ------------------------------------------------------------------------------
Trust 5           =        ------------------------------------------------------------------------------
Trust 6           =        ---------------------------------------------------------------------------------
Trust 7         =      ----------------------------------------------------------------------------------
Trust 8         =      ----------------------------------------------------------------------------------
Trust 9         =      ---------------------------------------------------------------------------------
Trust 10        =      ----------------------------------------------------------------------------------
Trust 11        =      ---------------------------------------------------------------------------------
Firm            =      ----------------------------
Attorney        =      ----------------------


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

This letter responds to your personal representative’s letter of March 28, 2024, and
subsequent correspondence, requesting an extension of time under § 2642(g) of the
Internal Revenue Code (Code) and § 301.9100-1 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 1, Taxpayer established Children’s Trust, an irrevocable trust, for the primary
benefit of Taxpayer’s and Spouse’s children (Children). Children's Trust has GST tax
potential.

During Years 1 through 5, Taxpayer established and funded eleven irrevocable grantor
retained annuity trusts (GRATs), Trusts 1 through 11. Under the terms of Trusts 1
through 11, Taxpayer retained an annuity for a term of years. At the expiration of the
term of the annuity period of each of Trusts 1 through 11, the trust property remaining in
each respective trust was to be distributed to Children’s Trust as the remainder
beneficiary.

Taxpayer survived the expiration of the annuity terms of Trusts 1 through 11 and the
estate tax inclusion period (ETIP) with respect to Taxpayer’s transfers funding Trusts 1
through 11 closed for GST purposes. In Year 3, the ETIP with respect to Taxpayer’s
transfers funding Trusts 1 through 3 closed on Dates 2 through 4, respectively. In Year
4, the ETIP with respect to Taxpayer’s transfers funding Trusts 4 and 5 closed on Dates
5 and 6, respectively. In Year 5, the ETIP with respect to Taxpayer’s transfers funding
Trusts 6 and 7 closed on Dates 7 and 8, respectively. In Year 6, the ETIP with respect
to Taxpayer’s transfer funding Trust 8 closed on Date 9. In Year 7, the ETIP with
respect to Taxpayer’s transfers funding Trusts 9 through 11 closed on Dates 10 through
12, respectively.

Attorney provided Taxpayer and Spouse with legal and tax advice in connection with the
creation and establishment of Trusts 1 through 11. Attorney advised Taxpayer and
Spouse of the automatic allocation rules under § 2632(c) and the ability to elect out of
the automatic allocation of GST exemption under § 2632(c)(5)(A)(i). Attorney further
advised Taxpayer and Spouse of the ability to consent to treat the transfers of each
spouse as having been made one-half by each spouse under § 2513. Pursuant to this
discussion, Taxpayer and Spouse decided that they wanted to consent to treat the
transfers of each spouse as having been made one-half by each spouse under § 2513
and wanted to elect out of the automatic allocation of GST exemption with respect to the
transfers to Trusts 1 through 11.

Taxpayer and Spouse retained Firm to prepare and file Taxpayer’s and Spouse’s Forms
709, United States Gift (and Generation-Skipping Transfer) Tax Returns, for Years 1
through 5, and relied on Firm to elect out of the automatic allocation of GST exemption
to the transfers to Trusts 1 through 11. However, in preparing Taxpayer’s and Spouse’s
Forms 709 for Years 1 through 5, Firm inadvertently failed to elect out of the automatic
allocation of GST exemption to the transfers to Trusts 1 through 11 as further reported
on Taxpayer’s Form 709 returns. Taxpayer and Spouse each elected to treat gifts
made by each as made by both under § 2513 and each reported one-half of the
transfers as gifts on Forms 709 for Years 1 through 5.

It has been represented that, to date, no taxable distributions, nor taxable terminations,
or any other events have occurred with respect to Trusts 1 through 11 or Children’s
Trust that would give rise to a GST tax liability.

Taxpayer requests an extension of time under § 2642(g) and § 301.9100-3 to elect out
under § 2632(c)(5)(A)(i)(I) of the automatic allocation of Taxpayer’s GST exemption to
the transfers to Trusts 1 through 11 at the close of the ETIP.

LAW AND ANALYSIS

Section 2601 imposes a tax on every generation skipping transfer (GST) made by a
“transfer” to a “skip person.” 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 imposed by § 2601 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.

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 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 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 is treated
as 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, as
defined in § 2632(c)(3)(B).

Under § 2632(c)(3)(B), provides, in part, that the term “GST trust” is a trust that could
have GST potential with respect to the transferor unless the trust satisfies any of the
exceptions listed in § 2632(c)(3)(B)(i)-(vi).

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 estate tax
inclusion period (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, in part, that an individual may elect to have the
automatic allocation rules of § 2632(c) not apply to an indirect skip or any or 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 the election 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 the estate tax inclusion period or 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). The 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.

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 — (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). Further,
§ 26.2632-1(b)(2)(iii)(A) provides that in the case of a transfer treated under § 2513 as
made one-half by the transferor and one-half by the transferor’s spouse, each spouse
shall be treated as a separate transferor who must satisfy separately the requirements
of § 26.2632-1(b)(2)(iii)(B) to elect out with respect to the transfer.

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.

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
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 estate tax inclusion period, 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)). If
such transfer is a direct skip, such skip shall be treated as occurring as of the close of
the ETIP.

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 § 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 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 taxpayer and one-half by taxpayer’s
spouse, but only if at the time of the gift each spouse is a citizen or resident of the
United States.

Section 2513(a)(2) provides that § 2513(a)(1) shall apply only if both spouses have
signified (under the regulations provided for in § 2513(b) their consent to the application
of § 2513(a)(1) in the case of all such gifts made by either while married to the other.

Section 2652(a)(1) provides, in part, that except as provided in § 2652(a) or § 2653(a),
the term “transferor” means, in the case of any property subject to the tax imposed by
chapter 12, the donor.

Section 2652(a)(2) and § 26.2652-1(a)(4) provide that, if, under § 2513, one-half of a
gift is treated as made by an individual and one-half of such gift is treated as made by
the spouse of the individual, then for purposes of the GST tax, each spouse is treated
as the transferor of one-half of the entire value of the property transferred by the donor
spouse, regardless of the interest the electing spouse is actually deemed to have
transferred under § 2513.

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.

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 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
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 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 file amended Forms 709 for
Years 1 through 5 to make an election under § 2632(c)(5)(A)(i)(I) that the automatic
allocation rules not apply to the transfers to Trusts 1 through 11 at the close of the ETIP.
The amended Form 709 returns for Years 1 through Year 5 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. A copy
of this letter should be attached to each Form 709.

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.

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 representatives.

                                          Sincerely,

                                          Associate Chief Counsel
                                          (Passthroughs & Special Industries)

                                          Karlene M. Lesho
                                    By:
                                          Karlene M. Lesho
                                          Chief, Branch 4
                                          Office of the Associate Chief Counsel
                                          (Passthroughs & Special Industries)
Enclosure:
      Copy for § 6110 purposes




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