Late relief granted to elect out of automatic GST exemption allocation for two GRATs

Plain-English summary

When someone makes a gift to certain trusts that could later skip a generation, the tax code automatically uses up part of the person's generation-skipping transfer (GST) tax exemption unless they formally "elect out" on a timely gift tax return. Here a taxpayer set up two grantor retained annuity trusts (GRATs). The taxpayer's lawyers told the accountant to elect out of the automatic GST allocation, but the accountant did not do so: the returns for the two trusts either were filed late or were filed on time without the elect-out statement. The taxpayer asked the IRS for extra time to make the elect-out elections under the "9100 relief" rules, which let the IRS forgive a missed election when the taxpayer acted reasonably and in good faith (including by relying on a tax professional who dropped the ball) and granting relief will not hurt the government. Because the request was filed before a May 6, 2024 cutoff that moved these requests to a different regulation, the IRS applied the older 9100 relief standard. The IRS found the requirements met and gave the taxpayer 120 days to elect out for both trusts by filing amended gift tax returns.

Ruling snapshot

• Question: Should the taxpayer get an extension of time to elect out of the automatic allocation of GST exemption for transfers to two GRATs?
• Outcome: approved
• Key authorities: IRC §§ 2632(c)(5), 2642(g); Treas. Reg. § 301.9100-3; Treas. Reg. § 26.2632-1(b)(2)

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202501004                                             Third Party Communication: None
 Release Date: 1/3/2025                                        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-106818-24
                                                               Date:
                                                               October 01, 2024




Legend

 Taxpayer              =        ----------------------------------------------------------
 Law Firm              =        --------------------------------------
 Accountant            =        ----------------------
 Date 1                =        --------------------------
 Date 2                =        ---------------------
 Date 3                =        --------------------------
 Date 4                =        --------------------------
 Date 5                =        --------------------------
 Date 6                =        --------------------------
 Year 1                =        -------
 Year 2                =        -------
 Year 3                =        -------
 Year 4                =        -------
 Trust 1               =        ----------------------------------------------------------------------------------
 Trust 2               =        ----------------------------------------------------------------------------------
                                --------------


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

        This letter responds to your authorized representative’s letter dated March 14,
2024, 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 trusts.

        The facts and representations submitted are summarized as follows:
PLR-106818-24                                2


       Taxpayer established Trust 1, a grantor retained annuity trust (GRAT). Taxpayer
funded Trust 1 on Date 1, in Year 1. Upon termination, the remainder interest in Trust 1
was paid to a trust for the benefit of Taxpayer’s descendants and then divided into equal
shares for the benefit of Taxpayer’s children. Trust 1 terminated on Date 5, in Year 3.
Thus, for GST tax purposes, the estate tax inclusion period (ETIP) with respect to Trust
1 closed on Date 5, in Year 3. It is represented that Taxpayer did not intend to allocate
GST exemption to Trust 1.

        On Date 2, attorneys from Law Firm provided Taxpayer’s accountant,
Accountant, with details in connection with the preparation of the Year 1 Form 709,
United States Gift (and Generation-Skipping Transfer) Tax Return, reporting the transfer
to Trust 1, and advised Accountant that Taxpayer should elect out of the automatic
allocation of GST exemption. However, Accountant failed to advise Taxpayer to elect
out of the automatic allocation of GST exemption and failed to file a timely Form 709 for
Year 1. The Form 709 for Year 1 was filed late and the return did not elect out of the
automatic allocation of GST exemption with respect to the transfer to Trust 1.
Thereafter, a Form 709 for Year 3 (the year the ETIP with respect to Trust 1 closed)
was filed late and the return did not elect out of the automatic allocation of GST
exemption with respect to the transfer to Trust 1.

       Taxpayer established Trust 2, a GRAT. Taxpayer funded Trust 2 on Date 3, in
Year 2. Upon termination, the remainder interest in Trust 2 was paid to a trust for the
benefit of Taxpayer’s descendants and then divided into equal shares for the benefit of
Taxpayer’s children. Trust 2 terminated on Date 6, in Year 4. Thus, for GST tax
purposes, the ETIP with respect to Trust 2 closed on Date 6, in Year 4. It is
represented that Taxpayer did not intend to allocate GST exemption to Trust 2.

       On Date 4, attorneys from Law Firm provided Accountant with details in
connection with the preparation of the Year 2 Form 709, reporting the transfer to Trust
2, and advised Accountant that Taxpayer should elect out of the automatic allocation of
GST exemption. Accountant prepared and timely filed a Form 709 for Year 2, but the
Form 709 did not elect out of the automatic allocation of GST exemption with respect to
the transfer to Trust 2. A Form 709 for Year 4 (the year the ETIP with respect to Trust 2
closed) was filed late and the return did not elect out of the automatic allocation of GST
exemption with respect to the transfer to Trust 2.

       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 the transfers made to Trust 1 and Trust 2.

         Taxpayer represents that no taxable distributions, taxable terminations, or any
other events have occurred with respect to the trusts that would give rise to a GST tax
liability.
PLR-106818-24                                 3

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.

       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)(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 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.
PLR-106818-24                                 4


       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; 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.

        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(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
PLR-106818-24                                  5

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 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). 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 of the Generation-Skipping Transfer Tax Regulations.

       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 Year 1 transfer to Trust 1 and
the Year 2 transfer to Trust 2. The elections should be made on amended Forms 709
for Year 3 and Year 4. The amended Forms 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.
PLR-106818-24                                             6

      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


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



         Enclosure:
                  Copy for § 6110 purposes
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