Closed years preserved gift splitting, later GRAT elections failed

Plain-English summary

A husband created a family trust for his wife and descendants and several grantor retained annuity trusts whose remainders passed to that family trust. The spouses elected gift splitting and made or reported generation-skipping transfer tax exemption allocations as the transfers occurred and the annuity trusts’ estate tax inclusion periods ended. Because the wife’s discretionary interest in the family trust could not be valued and separated, the transfers did not qualify for gift splitting under the ordinary rule. The IRS nevertheless treated gift splitting and related GST allocations for the earlier years as final because the assessment periods had expired. Gift splitting for two later GRATs was ineffective because that year remained open, but the husband could correct the return and allocate his remaining GST exemption when those trusts’ inclusion periods closed. The IRS declined to rule on regulatory relief for an unallocated part of the original family-trust gift.

Ruling snapshot

• Question: How did gift-splitting defects affect GST exemption allocations to a family trust and four GRAT remainders?
• Outcome: Mixed, earlier treatment was final, later gift splitting was ineffective, and corrective GST allocation remained available
• Key authorities: IRC §§ 2504(c), 2513, 2632, 2642(f), and 2652; Rev. Rul. 56-439

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201523003 Third Party Communication: None
Release Date: 6/5/2015 Date of Communication: Not Applicable
Index Number: 2513.00-00, 2632.00-00,
2652.00-00 Person To Contact:
-----------------------------------------------------
----------------------------------------------- -----------------
--------------------------------------------- Telephone Number:
------------------------- ----------------------
Refer Reply To:
CC:PSI:B04
RE: -------------------------------------------------- PLR-130266-14
-------------------------------------------------------- Date:
January 28, 2015

Legend

Husband -------------------------------------------------
Wife ----------------------------------------------------
Family Trust -------------------------------------------------------
Trust 1 -----------------------------------------------------
Trust 2 -----------------------------------------------------
Trust 3 -----------------------------------------------------------
Trust 4 -----------------------------------------------------------
Year 1 -------
Year 2 -------
Year 3 -------
Year 4 -------
Date 1 ---------------------------
Date 2 ---------------------------
Date 3 ----------------------------
Date 4 ---------------------------
Date 5 --------------------
Date 6 --------------------------
Date 7 ----------------------------
Date 8 ---------------------------
Date 9 ----------------------------
Date 10 --------------------
Date 11 ----------------------------
a ------------
b ----------
c ----------
PLR-130266-14 2

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

   This letter responds to your authorized representative’s letter dated

July 24, 2014, requesting rulings regarding the effect of gift splitting under § 2513 of the
Internal Revenue Code to certain transfers to trusts and the application of the
Generation-Skipping Transfer (GST) allocation rules under § 2632(c) to the transfers to
the trusts.

    The facts and representations submitted are summarized as follows:

   On Date 1 (during Year 1), Husband created Family Trust for the benefit of his

spouse (Wife) and their descendants. On Date 2 (during Year 1), Husband transferred
$a to Family Trust.

    Article 2, section 2.1 of Family Trust provides that the trustee may pay to or use

for the benefit of any one or more of Husband’s descendants and the spouses of his
descendants so much or all of the income and principal of the trust in such proportions
as the trustee, in the trustee’s discretion, determines to be required for their respective
support, health, and education. The independent trustee may pay to or use for the
benefit of any one or more of Wife, Husband’s descendants, and his descendant’s
spouses so much or all of the income and principal of the trust in such proportions as
the independent trustee, in the trustee’s discretion, determines to be desirable for their
respective welfare and best interests. Any income not so paid or used shall be added to
principal.

   On Date 1 (during Year 1), Husband created and funded Trust 1 and Trust 2 for

the benefit of Husband during the annuity periods. Trust 1 and Trust 2 were grantor
retained annuity trusts (GRATs). Trust 1’s annuity term ended on Date 4 (during Year
2). Trust 2’s annuity term ended on Date 8 (during Year 3). When the annuity terms
ended, the remaining principal of Trust 1 and Trust 2 became payable to Family Trust.
The end of the annuity terms represented the close of the estate tax inclusion period
(ETIP) for purposes of chapter 13.

    Husband and Wife each filed a Year 1 Form 709, United States Gift (and

Generation-Skipping Transfer) Tax Return on Date 3. On each form, Husband and Wife
signified their consent to treat the Year 1 gifts to Family Trust, Trust 1, and Trust 2 as
having been made one-half by each spouse under § 2513. Husband and Wife each
attached a statement to his and her Year 1 Form 709 electing out of the automatic
allocation rules of § 2632(c) with respect to the $a transfer to Family Trust. On each
Year 1 Form 709, Husband and Wife each affirmatively allocated his and her GST
exemption to $b, a portion of the total amount $a transferred to Family Trust. Husband
and Wife did not allocate his or her GST exemption to the remaining portion equal to $c
PLR-130266-14 3

that was transferred to Family Trust. Husband and Wife did not allocate his or her
GST exemption to the transfers to Trust 1 or Trust 2 because Trust 1 and Trust 2 were
subject to ETIPs.

   Husband filed a Year 2 Form 709 on Date 6 and, in an attachment, reported the

transfer of property from Trust 1 to Family Trust. Husband did not allocate his
GST exemption to this transfer. Wife did not file a Year 2 Form 709 and, accordingly,
did not allocate her GST exemption to any portion of the transfer of property from
Trust 1 to Family Trust.

   On Date 5 (during Year 3), Husband created and funded Trust 3, a GRAT, for the

benefit of Husband during the annuity period. Trust 3’s annuity term ended on Date 10
(during Year 4). When the annuity term ended, the remaining principal of Trust 3
became payable to Family Trust.

   On Date 7 (during Year 3), Husband created and funded Trust 4, a GRAT, for the

benefit of Husband during the annuity period. Trust 4’s an annuity term ended on
Date 11 (during Year 4). When the annuity term ended, the remaining principal of
Trust 4 became payable to Family Trust.

    Husband and Wife each filed a Year 3 Form 709 on Date 9. On each form,

Husband and Wife signified their consent to treat the Year 3 gifts to Trust 3 and Trust 4
as having been made one-half by each spouse under § 2513. Husband and Wife did
not allocate his or her GST exemption to the transfers to Trust 3 and Trust 4 because
both Trusts were subject to ETIPs. Husband and Wife affirmatively allocated his and
her GST exemption to one-half of the transfer of property from Trust 2 to Family Trust.
Further, in an attachment to the forms, Husband and Wife reported that his and her
GST exemption was automatically allocated to one-half of the Year 2 transfer of
property from Trust 1 to Family Trust under § 2632(c).

  Husband and Wife have not filed a Form 709 for Year 4 to report the transfer

from Trust 3 to Family Trust or the transfer from Trust 4 to Family Trust.

  All years at issue are subsequent to August 5, 1997 and December 31, 2000.

The period of limitations under § 6501 has expired with respect to the Years 1 and 2
Forms 709. The period of limitations has not expired with respect to the Years 3 and 4
Forms 709.

  You have requested the following rulings:

  1) The election to split gifts in Year 1 is effective with respect to Family Trust,
     Trust 1, and Trust 2.

PLR-130266-14 4

   2) Husband and Wife’s allocation of his and her GST exemption equal to $b to
      the Year 1 transfer to Family Trust is effective.

   3) At the close of the ETIP in Year 2, Husband’s and Wife’s GST exemption was
      automatically allocated to one-half of the transfer of property from Trust 1 to
      Family Trust.

   4) At the close of the ETIP in Year 3, Husband’s and Wife’s GST exemption was
      affirmatively allocated to one-half the transfer of property from Trust 2 to
      Family Trust.

   5) The election to split gifts in Year 3 is ineffective with respect to the transfers to
      Trust 3 and Trust 4.

   6) Husband may file a Form 709 to allocate his remaining GST exemption to the
      Year 4 transfers of property from Trust 3 and Trust 4 to Family Trust.

LAW AND ANALYSIS

Rulings 1, 2, and 5

   Section 2501(a)(1) imposes a tax for each calendar year on the transfer of

property by gift during the calendar year by any individual, resident or nonresident.
Section 2511(a) provides that subject to certain limitations, the gift tax applies whether
the transfer is in trust or otherwise, direct or indirect, and whether the property
transferred is real or personal, tangible or intangible.

   Section 2504(c) provides that if the time has expired under § 6501 within which a

tax may be assessed under chapter 12 on the transfer of property by gift made during a
preceding calendar period, the value thereof shall, for purposes of computing the tax
under this chapter, be the value as finally determined (within the meaning of
§ 2001(f)(2)) for purposes of this chapter.

   Section 25.2504-2(b) of the Gift Tax Regulations provides that if the time has

expired under § 6501 within which a gift tax may be assessed under chapter 12 on the
transfer of property by gift made during a preceding calendar period and the gift was
made after August 5, 1997, the amount of the taxable gift or the amount of the increase
in taxable gifts, for purposes of determining the correct amount of taxable gifts for the
preceding calendar periods is the amount that is finally determined for gift tax purposes
and such amount may not be thereafter adjusted. The rule in this paragraph applies to
adjustments involving all issues relating to the gift including valuation issues and legal
issues involving the interpretation of the gift tax law.
PLR-130266-14 5

    Section 2513(a)(1) provides, generally, that a gift made by one spouse to any

person other than the donor's spouse is considered for purposes of the gift tax as made
one-half by the donor and one-half by the donor's spouse, but only if at the time of the
gift each spouse is a citizen or resident of the United States.

    Section 25.2513-1(b)(4) provides that the consent is effective only if both

spouses signify their consent to treat all gifts made to third parties during that calendar
period by both spouses while married to each other as having been made one-half by
each spouse. Such consent, if signified with respect to any calendar period, is effective
with respect to all gifts made to third parties during such calendar period except, in part,
if one spouse transferred property in part to his or her spouse and in part to third
parties, the consent is effective with respect to the interest transferred to third parties
only insofar as such interest is ascertainable at the time of the gift and severable from
the interest transferred to his spouse.

   Section 25.2513-1(b)(5) provides that the consent applies alike to gifts made by

one spouse alone and to gifts made partly by each spouse, provided such gifts were to
third parties and do not fall within any of the exceptions set forth in § 25.2513-1(b)(1)
through (b)(4). The consent may not be applied only to a portion of the property interest
constituting such gifts. If the consent is effectively signified on either the husband's
return or the wife's return, all gifts made by the spouses to third parties (except as
described in subparagraphs (1) through (4) of this paragraph), during the calendar
period will be treated as having been made one-half by each spouse.

    In Rev. Rul. 56-439, 1956-2 C.B. 605, a gift is made in trust pursuant to which

the trustee is to distribute any part or all of the income or principal of the trust to or
among the spouse of the donor and other descendants of the donor at such times and
in such proportions and amounts as the trustee determines in its sole discretion. The
ruling concludes that, under the facts presented, the value of the right to receive the
income or principal to be distributed to the spouse is not susceptible of determination.
Therefore, the gift to the spouse is not severable from the gifts to the other
beneficiaries, and the gift may not to any extent be considered as made one-half by the
donor and one-half by his spouse within the meaning of § 2513.

   In this case, in Year 1, Husband transferred property to Family Trust, Trust 1,

and Trust 2. On their Year 1 Forms 709, Husband and Wife each elected gift split
treatment for those gifts. The property of Trust 1 and Trust 2 was transferred to
Family Trust at the end of the annuity terms of those trusts. Wife is an income and
principal beneficiary of Family Trust. Family Trust provides that the independent trustee
may pay to or use for the benefit of any one or more of Wife, Husband’s descendants,
and his descendant’s spouses so much or all of the income and principal of the trust in
such proportions as the independent trustee, in the trustee’s discretion, determines to
PLR-130266-14 6

be desirable for their respective welfare and best interests. Wife’s interests in the
income and principal of Family Trust are not susceptible of determination and, therefore,
Wife’s interests are not severable from the interests that the other beneficiaries have in
Family Trust. See Rev. Rul. 56-439. However, under § 2504(c), the time for
determining whether gift split treatment is effective with respect to the Year 1 through
Year 3 transfers of property to Family Trust has expired. Therefore, the gift split
treatment is irrevocable for purposes of the Year 1 transfer to Family Trust and the
Years 2 and 3 transfers of property from Trust 1 and Trust 2 to Family Trust.

    In Year 3, on their Forms 709, Husband and Wife each elected gift split treatment

for the transfers to Trusts 3 and 4. Under § 25.2513-1(b)(4), the election to split gifts is
not effective. The period of limitations has not expired for Year 3. Accordingly,
Husband is not precluded under § 2504(c) from filing a supplemental Year 3 Form 709
to report the Year 3 transfers to Trust 3 and Trust 4 as being made solely by him.

Rulings 3, 4, and 6

    Section 2601 imposes a tax on every generation-skipping transfer. A

generation-skipping transfer 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 imposed by § 2601 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 2631(a), as in effect for the years at issue, provides that for purposes of

determining the GST tax, 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(a)(1) 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)(4)(i) of the Generation-Skipping Transfer Tax Regulations

provides that an allocation of GST exemption to property transferred during the
transferor’s lifetime is made on Form 709.

   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
PLR-130266-14 7

be allocated to the property transferred to the extent necessary to make the inclusion
ratio for such property zero.

   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.

  Section 2632(c)(4) provides that for purposes of § 2632(c), an indirect skip to

which § 2642(f) applies shall be deemed to have been made only at the close of the
ETIP. The fair market value of such transfer shall be the fair market value of the trust
property at the close of the ETIP.

   Section 2632(c)(5)(A)(i)(1) provides, in part, that an individual may elect to have

§ 2632(c) not apply to an indirect skip or any or all transfers made by such individual to
a particular trust.

  Section 26.2632-1(b)(2)(i) provides that an indirect skip is a transfer of property

to a GST trust as defined in § 2632(c)(3)(B) provided that the transfer is subject to gift
tax and does not qualify as a direct skip. In the case of an indirect skip to which
§ 2642(f) does apply, the indirect skip is deemed to be made at the close of the ETIP
and the GST exemption is deemed to be allocated at that time. In either case, except
as otherwise provided in paragraph (b)(2)(ii) of this section, the automatic allocation of
exemption applies even if an allocation of exemption is made to the indirect skip in
accordance with § 2632(a).

    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. Under
§ 26.2632-1(c)(1)(ii), an affirmative allocation of GST exemption cannot be revoked, but
becomes effective as of (and no earlier than) the date of the close of the ETIP with
respect to the trust. If an allocation has not been made prior to the close of the ETIP,
an allocation of exemption is effective as of the close of the ETIP during the transferor’s
lifetime if made by the due date for filing the Form 709 for the calendar year in which the
close of the ETIP occurs (timely ETIP return).

   Section 26.2632-1(c)(3) provides, in part, that an ETIP terminates at the time at

which no portion of the property is includible in the transferor’s gross estate (other than
by reason of § 2035) or, in the case of an individual who is a transferor solely by reason
of an election under § 2513, the time at which no portion would be includible in the
gross estate of the individual’s spouse (other than by reason of § 2035).

    Section 2642(b)(1)(A) provides that, except as provided in § 2642(f), if the

allocation of the GST exemption to any transfers of property is made on a gift tax return
filed on or before the date prescribed by § 6075(b) for such transfer or is deemed to be
made under § 2632(b)(1) or (c)(1), the value of such property for purposes of § 2642(a)
PLR-130266-14 8

shall be its value as finally determined for purposes of chapter 12 (within the meaning of
§ 2001(f)(2)), or, in the case of an allocation deemed to have been made at the close of
an ETIP, its value at the time of the close of the ETIP.

    Section 2642(f)(1) provides that for purposes of determining the inclusion ratio,

if an individual makes an inter vivos transfer of property, and the value of such property
would be includible in the gross estate of such individual under chapter 11 if such
individual died immediately after making such transfer (other than by reason of § 2503),
any allocation of GST exemption to such property shall not be made before the close of
the ETIP (and the value of such property shall be determined under paragraph (2)).
Section 2642(f)(2)(B) provides, in part, that the value of such property shall be its value
as of the close of the ETIP.

   Section 2642(f)(3) provides that for purposes of § 2642(f), the term “estate tax

inclusion period” means any period after the transfer described in paragraph (1) during
which the value of the property involved in such transfer would be includible in the gross
estate of the transferor under chapter 11 if he died.

  Section 2652(a)(1) provides, in part, that except as provided in this subsection or

§ 2653(a), the term “transferor” means in the case of any property subject to the tax
imposed by chapter 12, the donor.

   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 such gift is treated as made by the spouse of
such individual, such gift shall be so treated for purposes of this chapter.

   Section 26.2652-1(a)(4) provides that in the case of a transfer with respect to

which the donor’s spouse makes an election under § 2513 to treat the gift as made
one-half by the spouse, the election spouse is treated as the transferor of one-half of
the entire value of the property transferred by the donor, regardless of the interest the
electing spouse is actually deemed to have transferred under § 2513. The donor is
treated as the transferor of one-half of the value of the entire property. See also
Example 2 of § 26.2632-1(c)(5).

   In this case, Family Trust is a GST Trust for purposes of § 2632(c). On the

Year 1 Forms 709, Husband and Wife each attached a statement electing not to have
the automatic allocation rules under § 2632(c) apply with respect to the $a transfer to
Family Trust, as provided in § 2632(c)(5)(A). On the forms, consistent with gift split
treatment, Husband and Wife each affirmatively allocated his and her GST exemption
equal to $b to the transfer to Family Trust. Husband and Wife did not allocate his or her
GST exemption to an amount equal to $c that was transferred to Family Trust. As
discussed above, the transfer to Family Trust did not qualify for gift split treatment
because Wife’s income and principal interests in Family Trust are not susceptible to
PLR-130266-14 9

determination and, therefore, her interests are not severable from the interests that the
other beneficiaries have in Family Trust. However, as stated above, under § 2504(c),
the time for determining whether gift split treatment is effective with respect to the
Year 1 through Year 3 transfers to Family Trust has expired. Therefore, under
§ 2652(a)(2), Husband and Wife will be treated as the transferor of one-half of the value
of the entire property transferred to Family Trust in Years 1 through 3. Accordingly,
Husband and Wife’s allocations of his and her $b GST exemption in Year 1 to the
transfer to Family Trust are effective. We decline to rule on whether 9100 relief is
available to Husband and Wife to allocate his and her GST exemption to $c. Further,
we rule that the automatic allocation rules under § 2632(c) applied to allocate Husband
and Wife’s GST exemption to one-half of the transfer of property from Trust 1 to Family
Trust in Year 2 at the close of the ETIP. Finally, we rule that Husband’s and Wife’s
affirmative allocation of his and her GST exemption to one-half of the transfer of
property from Trust 2 to Family Trust in Year 3 at the close of the ETIP is effective for
purposes of chapter 13.

    As discussed above, the statute of limitations under § 6501 has not expired with

regard to the Year 3 Forms 709. Assuming Husband files a supplemental Form 709 to
report the Year 3 transfers to Trusts 3 and 4 as being made solely by him, then
Husband may file a Year 4 Form 709 to allocate his available GST exemption to the
Year 4 transfers from Trusts 3 and 4 to Family Trust at the close of the ETIPs for those
trusts.

     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.

  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-130266-14 10

  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,



                              _________________________
                              Lorraine E. Gardner
                              Senior Counsel, Branch 4
                              Office of the Associate Chief Counsel
                              (Passthroughs and Special Industries)


  Enclosures
        Copy for § 6110 purposes
        Copy of this letter