Settlors receive late elections out of automatic GST allocation

Plain-English summary

Two settlors created irrevocable insurance trusts for their descendants before enactment of the automatic generation-skipping transfer exemption allocation rules. Later counsel reviewed the trusts but did not realize that GST exemption had begun to be allocated automatically to post-2001 transfers and did not advise the settlors to elect out. The mistake was discovered years later during additional estate-planning work. No trust distributions, taxable terminations, or other events creating GST tax liability had occurred. The IRS concluded that the regulatory-relief requirements were satisfied and granted 120 days to make retroactive elections out for specified transfers to the trusts. The elections were to be made on supplemental Forms 709 and would be effective as of each transfer date.

Ruling snapshot

• Question: Could the settlors make late elections out of the automatic GST exemption allocation rules for prior trust contributions?
• Outcome: Approved, with 120 days to file the elections.
• Key authorities: IRC §§ 2632(b)(3) and 2642(g); Treas. Reg. § 301.9100-3; Notice 2001-50.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201517001 Third Party Communication: None
Release Date: 4/24/2015 Date of Communication: Not Applicable
Index Number: 2632.02-00, 2642.00-00,
9100.00-00 Person To Contact:
-------------------------------------------------
-------------------------- Telephone Number:
---------------------------- ------- ------------
-------------------------- Refer Reply To:
----------------------------- CC:PSI:B04
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--------------------------------------------------- Date: DECEMBER 15, 2014

Legend

Settlor 1 = --------------------------------------------------
Settlor 2 = -----------------------------------------------------
Trust = ------------------------------------------------------------------
---------------------------
Trustee = -------------------
Date 1 = ------------------------
Date 2 = ---------------------------
Trust 1 = ----------------------------------------------------------------------------------

Trust 2 = ----------------------------------------------------------------------------------

Trust 3 = ---------------------------------------------------------------------------------

Trust 4 = ------------------------------------------------------------
= ---------------------------
Attorney 1 = ----------------
Attorney 2 = ---------------------
Year 1 = ------
Year 2 = ------
Year 3 = ------
Year 4 = ------
Year 5 = ------
Year 6 = ------
Year 7 = ------
Year 8 = ------
Year 9 = ------
Year 10 = ------

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Year 11 = ------
Year 12 = ------
Year 13 = ------
Year 14 = ------
Year 15 = ------
Year 16 = ------

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

  This letter responds to your authorized representative’s letter dated May 21, 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, Settlor 1 and Settlor 2 (Settlors) established an inter vivos irrevocable

trust (Trust). Trust established three separate trusts, Trust 1, Trust 2 and Trust 3. Trusts
1, 2 and 3 are for the benefit of Settlors’ issue. All three trusts are insurance trusts. On
Date 2, Settlor 2 created Trust 4 for the benefit of her spouse and issue.

   The terms of Trust 1 and Trust 2 provide that until the death of the last Settlor, the

Trustee may pay from the net income and principal, such amounts as determined by the
Trustee, in her absolute discretion, for health, education, support or maintenance of
Settlors’ issue.

   Trust 1 provides that, on the death of the second Settlor, Trust 1 is to be divided into

one share for each living child of Settlors and one share for each predeceased child of
Settlors who is survived by issue. Trust 1 further provides that, with respect to each share,
Trustee will distribute income or corpus to a child as necessary for health, education,
support or maintenance of that child. On Trust termination, the principal is to be distributed
to Trust 2.

    Trust 2 provides that, upon the termination of the estate of the last Settlor to die,

trust income and principal may be distributed to the issue of Settlors as Trustee, in her
absolute discretion, determines. Trust 2 terminates on the death of the last surviving issue
of Settlors.

  Trust 1 and Trust 2 provide that Settlors’ issue have withdrawal powers over a

proportionate share of each contribution to each Trust in an amount equal to the value of
any assets transferred to Trust 1 and Trust 2, prior to the death of the second Settlor. The
power may not exceed the maximum amount allowable at the time of the transfer as an

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exclusion from gift tax under § 2503(b)(3). Trust 1 and 2 further provide that that any
unexercised right shall lapse at the end of each year to the extent of the greater of $5,000
or 5 percent of the value of Trust 1.

  Trust 3 does not provide for any distributions during the lives of Settlors. On the

death of each Settlor, the proceeds of the insurance policies will be added to Trust 2.

    Trust 4 provides that during Settlor 2’s lifetime, the trustees may pay out of the

income or principal or both of the trust such amounts as the trustees in their sole discretion
determine to Settlor 2’s spouse and issue. Trust 4 further provides that Settlors’ issue
have withdrawal powers over a proportionate share of each contribution Trust 4 in an
amount equal to the value of any assets transferred to Trust 4 limited to the excess, if any,
of the maximum amount excludable from a Settlor’s taxable gift for such year under
§ 2503(b) over the amount that such child may withdraw from Trust 1 or Trust 2. Any
unexercised right shall be reduced at the end of each year by the greater of $5,000 or 5
percent of the value of Trust 4. If any Trust 4 property is includible in Settlor 2’s estate and
if Settlor 2’s spouse survives Settlor 2, the property is to be distributed to Settlor 2’s
spouse outright. All other property in Trust 4 is to be held in further trust by the trustees.
The trustees may distribute income and principal as in their sole discretion for the benefit
of Settlor 2’s spouse and her issue. At the death of Settlor 2’s spouse, the trustees are to
distribute outright or in further trust to such of Settlor 2’s issue as spouse appoints by will.
If the property is held in further trust for the benefit of Settlor 2’s issue, the trustees are
instructed to distribute various percentages of the principal until a beneficiary reaches the
age of 50, at which time all of the assets remaining in the beneficiary’s trust will be
distributed and the trust will terminate.

   Attorney 1 provided Settlors with legal and tax advice in connection with the

creation of Trust in Year 1. However, Trust was created prior to the enactment of
§ 2632(c) which provides for an election out of the automatic allocation rules. Attorney 1
was not actively advising Settlors at the time § 2632(c) was enacted in June 2001. No
GST allocation was made to Trust 1, Trust 2 or Trust 3, in the years prior to the enactment
of § 2032(c) and no affirmative GST allocation has ever been made to Trust 1, Trust 2 or
Trust 3.

     Settlors believed that all of their gifts to Trust 1, Trust 2 and Trust 3, were eligible for

the annual exclusion under § 2503(b) and consequently, that no Forms 709 United States
Gift (and Generation-Skipping Transfer) Tax Returns were required for Years 1 through 14.
Consequently, no Forms 709 were filed for Years 1 through14. Settlors were not required
to file Forms 709 for Years 1 through 10. However, Settlors should have filed Forms 709
for Years 11 through 14. Settlors now plan to file Forms 709 for Years 11 through 14. No
gift or GST tax liability exists for any of those years.

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   Settlors retained Attorney 2 in Year 5 to advise them on estate and gift planning

matters including tax consequences of their transfers to Trust. Although Attorney 2
reviewed Trust, he did not realize that automatic allocations were being made to property
transferred to Trusts 1, 2 and 3 beginning in 2001 under § 2632(c), and thus did not
provide guidance to Settlors to opt out of any future GST allocations. Attorney provided
additional advice in Year 7 when Settlor 1 established Trust 4.

   In Year 15, Attorney 2 again provided counsel to Settlors with respect to their

available unified estate and gift tax credit and GST tax exemption. The advice given was
premised on the understanding that none of Settlors’ lifetime GST tax exemption had been
allocated to any lifetime transfers. In Year 16, in connection with analyzing the tax
consequences of certain transactions made by Settlors during Year 15, Attorney 2
determined that automatic allocations of GST exemption had been made to property
transferred to Trust 1, Trust 2 and Trust 3, beginning in 2001. Settlors have opted out of
the automatic allocation for property transferred to Trust 1, Trust 2 and Trust 3, as well as
Trust 4 for Year 15.

   No distributions have been made from Trust 1, Trust 2, Trust 3 or Trust 4, nor have

any taxable terminations or other events occurred giving rise to GST tax liability.

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 the tax imposed by § 2601 is the taxable

amount multiplied by the applicable rate.

   Section 2612(c) provides that the term "direct skip" means a transfer subject to a

tax imposed by chapter 11 or 12 of an interest in property to a skip person.

  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.

   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.

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   Section 2631(b) provides that any allocation under § 2631(a), once made, shall be

irrevocable.

  Section 2631(c) 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(b)(1) provides that if any individual makes a direct 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 direct skip exceeds such unused portion,
the entire unused portion shall be allocated to the property transferred.

   Section 2632(b)(2) provides that for purposes of § 2632(b)(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(b)(3) provides that an individual may elect to have the automatic

allocation rule of § 2632(b)(1) not apply to a transfer.

   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 2641(b) provides that the term "maximum Federal estate tax rate" means

the maximum rate imposed by § 2001 on the estates of decedents dying at the time of the
taxable distribution, taxable termination, or direct skip, as the case may be.

    Under § 2642(a)(1), 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 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 any Federal estate tax or state death tax
actually recovered from the trust attributable to such property, and any charitable
deduction allowed under § 2055 or 2522 with respect to such property.

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  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, 2001-2 C.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 301.9100-1(a).

   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.

   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

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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, Settlor 1 and Settlor 2 are
granted an extension of time of 120 days from the date of this letter to make an election
under § 2632(b)(3) that the automatic allocation rules do not apply to the Year 4 through
14 transfers to Trust 1, Trust 2 and Trust 3. In addition, Settlor 2 is granted an extension
of time of 120 days from the date of this letter to make an election under § 2632(b)(3) that
the automatic allocation rules do not apply to the Year 8 through 14 transfers to Trust 4.
The election out will be effective as of the date of each transfer. The election should be
made on supplemental Forms 709 for Year 4 and Year 8. The Forms 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 representatives.

   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.

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  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 and Special Industries)


  Enclosures
        Copy for § 6110 purposes
        Copy of this letter