Estate receives late election out of automatic GST allocation

Plain-English summary

A donor created a trust for a child and hired an accounting firm to prepare the related gift tax return. The firm failed to attach the statement electing out of the automatic allocation of generation-skipping transfer tax exemption. After the donor died, the executor's law firm discovered the omission. No later transfers, taxable distributions, or taxable terminations had occurred. Because the donor reasonably relied on a qualified tax professional, the IRS granted 120 days to make the election out effective as of the original transfer date. The election must be made on a supplemental Form 709 with a copy of the ruling attached.

Ruling snapshot

• Question: May the estate make a late election out of automatic GST exemption allocation for the donor's lifetime trust transfer?
• Outcome: Approved
• Key authorities: IRC §§ 2632(c)(5) and 2642(g); Treas. Reg. §§ 26.2632-1(b)(2)(iii) and 301.9100-3; Notice 2001-50

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201444019 Third Party Communication: None
Release Date: 10/31/2014 Date of Communication: Not Applicable
Index Number: 2632.02-00, 2642.00-00,
9100.00-00 Person To Contact:
------------------, ID No. ----------------
------------------------------------- Telephone Number:
---------------------------------------- -----------------------------
--------------------------- Refer Reply To:
-------------------------------------- CC:PSI:04
PLR-112168-14
Date:
July 16, 2014

Legend

Donor = ---------------------------------------------------
Trust = ----------------------------------------------------------------
Date 1 = ---------------------
Date 2 = ---------------------------
Year = ------
Child = -----------------------------
Executor = -----------------------
Accounting Firm = -------------------------
Law Firm = ----------------------------------

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

   This letter responds to your authorized representative’s letter dated March 6,

2014, 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 of the
generation-skipping transfer (GST) exemption automatic allocation rules.

     The facts and representations submitted are summarized as follows:

    On Date 1, a date after December 31, 2000, Donor created and funded an

irrevocable inter vivos trust (Trust) for the benefit of Child. Pursuant to the terms of
Trust, the trustee has discretion to make distributions of principal or income for the
benefit of Child. When Child reaches the age of 35, Trust will terminate, and the
remaining property will be distributed outright to Child. If Child dies prior to attaining
age 35, the Trust property remaining on the date of Child’s death will be distributed in
equal shares to Child’s living siblings. However, if a sibling is under the age of 35, such
sibling’s share shall be held in further trust until that sibling attains age 35. If neither of

PLR-112168-14 2

Child’s siblings is living at the time of Child’s death, the remaining Trust property will be
distributed to Child’s half-sibling, or held in further trust if Child’s half-sibling is under the
age of 35. If Child’s half-sibling is not living at the time of Child’s death before age 35,
then the remaining Trust property is distributed to Donor’s grandchildren, and if none
are living, then equally to Donor’s five siblings, per stirpes.

   Donor retained Accounting Firm to prepare a Form 709, United States Gift (and

Generation-Skipping Transfer) Tax Return, for Year reporting the transfer. However,
Accounting Firm did not include with the Form 709 an election out statement to avoid
the automatic allocation of Donor’s GST exemption to the Date 1 transfer of property to
Trust.

  On Date 2, Donor died. Executor retained Law Firm to administer the estate.

During the estate administration, Law Firm reviewed Donor’s Year Form 709 and noted
the Accounting Firm’s failure to include the election out statement.

    Donor did not make any additional transfers to Trust, and to date, no taxable

distributions or taxable terminations have occurred with respect to Trust.

 Executor now seeks a ruling granting an extension of time to elect out of the

automatic allocation rules with respect to Donor’s Year transfer to Trust.

   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 2613(a) provides, in part, that the term “skip person” means (1) a natural

person assigned to a generation which is 2 or more generations below the generation
assignment of the transferor, or (2) a trust, (A) if all interests in such trust are held by
skip persons or (B) if, (i) there is no person holding an interest in such trust, and (ii) at
no time after such transfer may a distribution (including distributions on termination) be
made from such trust to a non-skip person.

    Section 2602 provides that the amount of the 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. Under § 2642(a), the inclusion ratio with respect to any property
transferred in a generation-skipping transfer is the excess (if any) 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 the GST exemption under § 2631 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.

PLR-112168-14 3

   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(c)(1) provides that, for purposes of § 2631(a), the GST exemption

amount for any calendar year shall be equal to the applicable exclusion amount under
§ 2010(c) for such calendar year.

   Section 2632(a)(1) provides that any allocation by an individual of his or her GST

exemption may be made at any time on or before the date prescribed for filing the
estate tax return for such individual's estate, regardless of whether such a return is
required to be filed. Section 2632(a)(2) provides that the manner in which allocations
are to be made shall be prescribed by forms or regulations issued by the Secretary.

     Section 2632(c)(1) provides that if any individual makes an indirect skip during

his 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 (automatic allocation). 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)(2) provides that for purposes of § 2632(c)(1), the unused portion

of an individual’s GST exemption is that portion of such exemption which has not
previously been allocated by such individual (or treated as allocated under § 2632(b)(1)
or §2632(c)(1)).

   Section 2632(c)(3)(A) provides that for purposes of § 2632(c), 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)(5)(A)(i)(I) and (II), an individual may elect to have the automatic allocation rule
in § 2632(c)(1) not apply to an indirect skip, or 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 26.2632-1(b)(2)(iii) of the Generation-Skipping Transfer Tax Regulations

provides, in part, that to elect out, the transferor must attach a statement (election out
statement) to a Form 709 filed within the time period provided in §26.2632-1(b)(2)(iii)(C)
(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). The election out statement must identify the trust (except for an election out

PLR-112168-14 4

under § 26.2632-1(b)(2)(iii)(A)(4)) and specifically provide that the transferor is electing
out of the automatic allocation of GST exemption with respect to the described transfer
or transfers. Further, unless the election out is made for all transfers made to the trust
in the current year, the current-year transfers to which the election out is to apply must
be specifically described or otherwise identified in the election out statement.

   Section 26.2632-1(b)(2)(iii)(C) provides, in part, that to elect out, the Form 709

with the attached election out statement must be filed on or before the due date for
timely filing (within the meaning of § 26.2632-1(b)(1)(ii)) of the Form 709 for the
calendar year in which the first transfer to be covered by the election out was made.

   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
this paragraph.

   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
expressly prescribed by statute.

   Notice 2001-50, 2001-34 I.R.B. 189, provides that, under § 2642(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.

   Sections 301.9100-1 through 301.9100-3 provide the standards the

Commissioner will use to determine whether to grant an extension of time to make an
election.

   Section 301.9100-2 provides an automatic extension of time for making certain

elections. Section 301.9100-3 provides the standards used to determine whether to
grant an extension of time to make an election whose date is prescribed by a regulation
(and not expressly provided by statute). 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) or (b)(2) or an election described in § 2632(b)(3) or (c)(5) under the
provisions of §301.9100-3.

PLR-112168-14 5

    Section 301.9100-3(a) provides, in part, that requests for relief subject to

§ 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 the grant of relief will not prejudice the interests of the Government.

   Section 301.9100-3(b)(1) provides, in part, except as provided in

§ 301.9100-(b)(3)(i) through (iii), 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. Accordingly, Donor 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) that the automatic allocation rules do not apply to the Year transfer to
Trust. The election out will be effective as of the date of the transfer, Date 1.

   The election should be made on a supplemental Form 709 for Year. The Form

709 should be filed with the Cincinnati Service Center at the following address: Internal
Revenue Service, Cincinnati Service Center - Stop 82, Cincinnati, OH 45999. You
should attach a copy of this letter to the supplemental Form 709. We have enclosed a
copy for this purpose.

  In accordance with the Power of Attorney on file with this office, we have sent a

copy of this letter to your authorized representative.

   Except as expressly provided herein, we neither express nor imply any opinion

concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.

  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.

PLR-112168-14 6

  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,



                                  Leslie H. Finlow
                                  Senior Technician Reviewer, Branch 4
                                  Office of the Associate Chief Counsel
                                  (Passthroughs & Special Industries)

Enclosure

Copy for § 6110 purposes

cc: