PLR 200930033: Extension granted to elect out of automatic GST allocation for an insurance trust

Plain-English summary

The IRS granted a grantor an additional 60 days to elect out of the automatic allocation of generation-skipping transfer tax exemption to an irrevocable insurance trust for the grantor's sister. The grantor had not intended the trust to be a generation-skipping transfer tax trust and had relied on tax professionals who did not believe an election was required. The IRS found that the requirements for relief under section 301.9100-3 were satisfied. The election was to be made on supplemental Forms 709, with a copy of the ruling attached.

Ruling snapshot

• Question: May a grantor receive an extension of time to elect out of automatic GST exemption allocation to an insurance trust?
• Outcome: Approved
• Key authorities: IRC §§ 2632 and 2642; Treas. Reg. §§ 26.2632-1 and 301.9100-3

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 200930033
Third Party Communication: None
Release Date: 7/24/2009
Date of Communication: Not Applicable
Index Number: 2632.01-00, 2632.01-00,
9100.01-00
Person To Contact:
-------------------------, ID No. -------------
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Telephone Number:
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Refer Reply To:
CC:PSI:B04
PLR-146610-08
Date: APRIL 15, 2009

Re: -----------------------------------------

Legend

Grantor = -----------------------------------------------------------
Sister = --------------------------
Trust = -----------------------------------------------------------
Trustees = ---------------------------------------------------------------------------------------
-----------------------------------------
Law Firm = -----------------------------------------------------------
Accountant = ----------------
Attorney 1 = ----------------------------
Attorney 2 = ------------------
Date 1 = ---------------------------
Year 1 = -------

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

This is in response to correspondence requesting an extension of time under § 301.9100 of the Procedure and Administration Regulations and § 2632 of the Internal Revenue Code to elect not to have the automatic allocation rules of § 2632(c) apply to a trust.
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Facts

On Date 1, Grantor established Trust, an irrevocable insurance trust, for the benefit of Sister. The trustees of Trust are Trustees. Trust was funded with cash and debentures in Year 1. Under the terms of Trust, there is a possibility that a Generation- Skipping Transfer (GST) may occur and Trust may be considered a GST Trust as defined in § 2632(c)(3)(B).

Grantor has children and Sister does not. Grantor had not intended Trust to be a GST trust and never intended GST exemption to be automatically allocated to Trust. Law Firm drafted Trust. Form 709 United State Gift (and Generation-Skipping) Tax Return for Year 1 was prepared by Accountant and reviewed by Attorney 1. Affidavit from Attorney 1 states that Attorney 1 did not believe that an election out of the automatic allocation rules was required because he did not believe that Trust was a GST trust with respect to Grantor. Affidavit from Accountant states that Grantor did not intend to allocate any of his GST exemption to his transfers to Trust. It also states that Accountant did not believe that an election out of the automatic allocation rules was required because he did not believe that Trust could have GST transfers with respect to Grantor.

Grantor executed an affidavit stating that he did not intend to allocate any of his GST exemption to Trust for the benefit of Sister and that he relied on Accountant and Attorney 1 to properly file his return. When Attorney 2 discovered that Trust could be treated as a GST Trust, she recommended Grantor file a ruling request to request an extension of time under § 2642(g) and § 301.9100 to make an election under § 2632(c)(5)(A)(i) not to have the automatic allocation rules of § 2632(c) apply to Trust.

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.

Under § 2642(a)(1), the inclusion ratio with respect to any property transferred in a generation-skipping transfer is defined as the excess of 1 over the "applicable fraction." The applicable fraction, as defined in § 2642(a)(2), is a fraction, the numerator of which is the amount of GST exemption allocated to the trust (or to property transferred in a direct skip), and the denominator of which is the value of the property transferred to the trust (or involved in the direct skip), reduced by the sum of certain federal estate tax or state death tax and charitable deductions.
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Section 2631(a) provides that, for purposes of determining the inclusion ratio, every individual shall be allowed a GST exemption amount that 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 an individual's GST exemption may be allocated 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 return is required to be filed. Under § 26.2632-1(d)(1), an allocation of a decedent's available GST exemption by the executor of the decedent's estate is made on Form 706 filed on or before the date prescribed for filing the return by § 6075(a) (including any extensions granted). An allocation of GST exemption with respect to property included in the gross estate of a decedent is effective as of the date of death.

Section 2632(c) 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 for purposes of this subsection, 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 a the term "GST trust" means a trust that could have a generation-skipping transfer with respect to the transferor unless one or more of subsections (i) through (vi) are satisfied.

Section 2632(c)(5)(A)(i)(II) provides that an individual may elect to have this subsection not apply to any or all transfers made by such individual to a particular trust. 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 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). Such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of § 2642(g)(1), which was enacted into law on June 7, 2001.

Section 2642(g)(1)(B) provides that in determining whether to grant relief under this paragraph, the Secretary shall take into account all relevant circumstances, including evidence of intent contained in the trust instrument or instrument of transfer
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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 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 GST 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 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 200150, 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.

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.

A GST trust is defined in § 2632(c)(3)(B), in general, as any trust that could have a generation-skipping transfer. A trust is a GST Trust unless it meets one of the exceptions described in § 2632(c)(3)(B)(i) through (vi) where a sufficient possibility exists (based on the statutory criteria) that the trust corpus will not be distributed to lower generations. Based upon the facts submitted and the representations made, we conclude there is a possibility that a Generation-Skipping Transfer (GST) may occur and Trust may be considered a GST Trust as defined in § 2632(c)(3)(B).
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Further, we conclude that the requirements of § 301.9100-3 have been satisfied.
Therefore, Grantor is granted an extension of time of 60 days from the date of this letter to make the election out of the automatic allocation of GST exemption under
§ 2632(c)(5)(A)(i)(II) for the transfers to Trust.

The elections should be made on Supplemental Forms 709 filed with the Internal Revenue Service Center, Cincinnati, Ohio 45999. A copy of this letter should be attached to the Forms 709. A copy is enclosed for this purpose.

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) 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.

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.

Sincerely,

Curt G. Wilson
Associate Chief Counsel
(Passthroughs and Special Industries)

Enclosures
Copy for section 6110 purposes
Copy of this letter