PLR 200449022: Spouses get time to allocate GST exemptions to trust gifts

Plain-English summary

One spouse made cash gifts to a trust for their children and descendants in three years. The spouses elected gift splitting on returns for the first two years, but their accounting firms did not allocate either spouse's generation skipping transfer tax exemption to those gifts. A different firm advised them that no gift tax returns were needed for the third year, so no exemption was allocated then either. The IRS granted both spouses 60 days to allocate their available GST exemptions to the transfers, effective on the original transfer dates and based on the property values on those dates. The IRS did not decide the property's value for federal transfer tax purposes.

Ruling snapshot

• Question: May both spouses make late GST exemption allocations to gifts to the family trust from three years?
• Outcome: Approved a 60 day extension for the allocations.
• Key authorities: IRC §§ 2513, 2642(g), 2652(a)(2); Treas. Reg. § 301.9100-3; Notice 2001-50.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200449022
[Third Party Communication:
Release Date: 12/3/04
Date of Communication: Month DD, YYYY]
Index Number: 2642.01-00, 2513.00-00,
9100.00-00
Person To Contact:
--------------------------, ID No. ------------
--------------------------
Telephone Number:
---------------------------
--------------------
----------------------
Refer Reply To:
-----------------------------
CC:PSI:B09
PLR-128902-04
In Re:
Date:
--------------------------------
August 17, 2004

Legend:

Taxpayer 1 = ----------------------------------------------------
Taxpayer 2 = ------------------------------------------------------
Trust = -----------------------------------------------------------------------
------------------------------------------
Accounting Firm 1 = -----------------------------------------------------
Accounting Firm 2 = ---------------------------------------
Law Firm = -----------------------------
Date 1 = -------------------
Date 2 = ----------------
Date 3 = ---------------------
Date 4 = ---------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = -------
A = -------------
B = -----------
C = ---------

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

This is in response to your letter dated March 9, 2004, and subsequent correspondence, in which you requested an extension of time pursuant to ' 2642(g) of the Internal Revenue Code and ' 301.9100-3 of the Procedure and Administration Regulations to allocate generation-skipping transfer (GST) tax exemption to transfers made to a trust.

2

The facts submitted and the representations made are as follows. In Year 1, on Date 1, Taxpayers 1 and 2 formed Trust for the benefit of the children of their marriage and the descendants of any such children.

Article First (A) of Trust provides that during the lives of Taxpayers 1 and 2, the trustee is to pay to the children of the marriage of Taxpayers 1 and 2 and their descendants trust net income and principal to provide for their education, comfort, support, health, maintenance, or for any other purpose whatsoever. There is no requirement to equalize distributions among beneficiaries. Net income not distributed is to be accumulated and added to principal.

Article First (A) and Article Second provide that in the event that, upon the death of the last to die of Taxpayers 1 and 2, Taxpayers 1 and 2 are survived by living children of their marriage or descendants of these children, trust principal and undistributed income is to be divided into equal shares, one for each living child and deceased child survived by living descendants.

Article Second (A) provides that each share for a deceased child is to be further divided into equal shares, per stirpes, one for each descendant, and held in further trust pursuant to the terms of Article Second (C).

Article Second (B) provides that each share for a living child is to be held in further trust pursuant to the terms of Article Second (C).

Article Second (C) provides that the trustee of a trust established for a child or descendant (beneficiary) is to distribute trust net income and principal to the beneficiary and the beneficiary’s descendants to provide for their education, comfort, support, health, maintenance, or for any other purpose whatsoever. There is no requirement to equalize distributions among beneficiaries. Net income not distributed is to be accumulated and added to principal.

Article Second (C) further provides that each beneficiary has a testamentary limited power of appointment over his or her trust. Trust estate not effectively appointed is to be divided into equal shares, per stirpes, one share for each descendant of the beneficiary, and held in further trust pursuant to the terms of Article Second (C).

On Date 2, which is in Year 1, Taxpayer 1 transferred $ A in cash to Trust. Taxpayers 1 and 2 retained Accounting Firm 1 to prepare their Year 1 Forms 709 (United States Gift (and Generation-Skipping Transfer) Tax Returns). On these returns, Taxpayers 1 and 2 consented to treat gifts made by either in Year 1 as made one-half by each pursuant to ' 2513. Accounting Firm 1 inadvertently failed to allocate Taxpayer 1’s and Taxpayer 2’s GST exemptions to the Year 1 transfer to Trust.

3

On Date 3, which is in Year 2, Taxpayer 1 transferred $ B in cash to Trust. Taxpayers 1 and 2 retained Accounting Firm 2 to prepare their Year 2 Forms 709. On the returns, Taxpayers 1 and 2 consented to treat gifts made by either in Year 2 as made one-half by each pursuant to ' 2513. Accounting Firm 2 inadvertently failed to allocate Taxpayer 1’s and Taxpayer 2’s GST exemptions to the Year 2 transfer to Trust.

On Date 4, which is in Year 3, Taxpayer 1 transferred $ C in cash to Trust. Accounting Firm 2 advised Taxpayers 1 and 2 that it was not necessary to file Forms 709 for the Year 3 transfer to Trust. Since no returns were filed, Taxpayer 1’s and Taxpayer 2’s GST exemptions were not allocated to the Year 3 transfer to Trust. It has been represented that Taxpayers 1 and 2 intend to consent to treat gifts made by either in Year 3 as made one-half by each pursuant to ' 2513.

In Year 4, Taxpayers 1 and 2 retained Law Firm to provide estate planning advice. In the course of its engagement, Law Firm discovered that Taxpayer 1’s and Taxpayer 2’s GST exemptions had not been allocated to the transfers Taxpayer 1 made to Trust in Years 1, 2, and 3. It has been represented that Taxpayers 1 and 2 currently have sufficient GST exemption available to allocate to the transfers Taxpayer 1 made to Trust in Years 1, 2, and 3.

Taxpayers 1 and 2 are requesting an extension of time under '' 2642(g) and 301.9100-3 to allocate their GST exemptions to the transfers Taxpayer 1 made to Trust in Years 1, 2, and 3, and that such allocations will be based on the value of the property transferred to Trust in Years 1, 2, and 3.

Law and Analysis:

Section 2501(a)(1) provides that a tax, computed as provided in ' 2502, is imposed for each calendar year on the transfer of property by gift during such calendar year by any individual, resident, or nonresident.

Section 2511(a) provides that the tax imposed by ' 2501 shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible.

Section 2513(a)(1) provides, in part, that a gift made by one spouse to any person other than his spouse shall, for the purposes of this chapter, be considered as made one-half by him and one-half by his 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 during the calendar year by either while married to the other.

PLR-128902-04
4

Section 25.2513-2(a)(1) of the Gift Tax Regulations provides, in part, that consent to the application of the provisions of ' 2513 with respect to a "calendar period" (as defined in ' 25.2502-1(c)(1)) shall, in order to be effective, be signified by both spouses. If both spouses file gift tax returns within the time for signifying consent, it is sufficient if--(i) the consent of the husband is signified on the wife's return, and the consent of the wife is signified on the husband's return; (ii) the consent of each spouse is signified on his own return; or (iii) the consent of both spouses is signified on one of the returns. If only one spouse files a gift tax return within the time provided for signifying consent, the consent of both spouses shall be signified on that return.

Section 2601 imposes a tax on every generation-skipping transfer (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 of $1,000,000 (adjusted for inflation under
§ 2631(c)) 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 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’s estate (determined with regard to extensions), regardless of whether such a return is required to be filed.

Section 26.2632-1(b)(2) of the Generation-Skipping Transfer Tax Regulations provides that an allocation of GST exemption to property transferred during the transferor’s lifetime, other than in a direct skip, is made on Form 709.

As applicable during the year at issue, § 2642(b)(1) provided in relevant part that if the allocation of the GST exemption to any transfers of property is made on a timely filed gift tax return or is deemed to be made under § 2632(b)(1) [deemed allocations to certain lifetime direct skips] – (A) the value of such property for purposes of determining the inclusion ratio shall be its value for purposes of chapter 12, and (B) such allocation shall be effective on and after the date of such transfer.

PLR-128902-04
5

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). Such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of § 2642(g)(1)(A), which was enacted into law on June 7, 2001.

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

Section 2652(a)(2) provides that if, under § 2513, one-half of a gift is treated as made by an individual and one-half of the gift is treated as made by the spouse of such individual, such gift shall be so treated for purposes of the generation-skipping transfer tax.

Notice 2001-50, 2001-2 C.B. 189, provides that under § 2624(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.

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 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) under the provisions of § 301.9100-3.

PLR-128902-04
6

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.

Based on the facts submitted and the representations made, we conclude that the requirements of § 301.9100-3 have been satisfied. Therefore, Taxpayers 1 and 2 are granted an extension of time of sixty (60) days from the date of this letter to allocate their available GST exemptions to the transfers to Trusts made in Years 1, 2 and 3. The allocations will be effective as of the dates of the transfers, and should be made based on the value of the property transferred to Trusts on those dates.

The allocations for the transfers made to Trust on Dates 2 and 3 should be made on supplemental Forms 709 for Years 1 and 2 and filed with the Internal Revenue Service Center, Cincinnati, Ohio 45999. A copy of this letter should be attached to each supplemental Form 709. Copies are enclosed for this purpose.

Because the Year 3 transfer to Trust was not reported on Forms 709, Forms 709 for Year 3 must be filed with the Internal Revenue Service Center, Cincinnati, Ohio 45999, reporting the gift and allocating GST exemption thereto. A copy of this letter should be attached to each Form 709 filed. Copies are enclosed for this purpose.

The rulings contained in this letter are based upon information and representations submitted by the 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. Specifically, no opinion is expressed or implied concerning the value of the property Taxpayer 1 transferred to Trust in Years 1 through 3 for federal transfer tax purposes.

This ruling is directed only to the taxpayers requesting it. Section 6110(k)(3) provides that it may not be used or cited as precedent.

PLR-128902-04
7

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,

Heather C. Maloy

Heather C. Maloy
Associate Chief Counsel
(Passthroughs & Special Industries)

Enclosure: Copy for § 6110 purposes
Copies of this letter

cc: