GST exemption allocations to non-skip grandchildren are void

Plain-English summary

A married couple made outright gifts to two grandchildren after the grandchildren's parent, the couple's child, had died. The couple allocated generation-skipping transfer tax exemption to the gifts on timely gift tax returns. Under the deceased-parent rule, each grandchild was treated as one generation below the donors rather than as a skip person. Because the gifts had no GST potential, the IRS ruled that the exemption allocations were void.

Ruling snapshot

• Question: Are GST exemption allocations valid when outright gifts to grandchildren have no GST potential under the deceased-parent rule?
• Outcome: Approved
• Key authorities: IRC §§ 2631, 2651(e); Treas. Reg. §§ 26.2632-1(b)(4)(i), 26.2651-1

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201536012 Third Party Communication: None
Release Date: 9/4/2015 Date of Communication: Not Applicable
Index Number 2632.00-00, 2642.00-00
Person To Contact:
----------------------- -----------------------, ID No. -------------
----------------- Telephone Number:
------------------------------ --------------------
Refer Reply To:
CC:PSI:B04
PLR-143964-14
In re: ----------------------------------------------------- Date:
-------------------------------------------------------- May 22, 2015

LEGEND:

Taxpayer = ---------------------
-------------------------------------
Spouse = ------------------
-------------------------------------
Child = -----------------
Grandchild A = ------------------
Grandchild B = -----------------
Year 1 = ------
Year 2 = ------
Year 3 = ------
Year 4 = ------
Year 5 = ------
Date = --------------------------
a = ---------
b = ---------
c = ---------
d = -------
e = ---------
f = ---------
g = -----------
h = -----------
x = ------
PLR-143964-14 2

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

This letter responds to your authorized representative’s letter of November 21, 2014,
and other correspondence, requesting a ruling on the application of § 2632 of the
Internal Revenue Code (Code) to certain allocations of generation-skipping transfer
(GST) tax exemption.

The relevant facts, as represented, are as follows.

From Year 2 through Year 5, Taxpayer and his spouse (Spouse) made outright gifts to
Grandchild A and Grandchild B. Grandchild A and Grandchild B are the children of
Taxpayer and Spouse’s child (Child). Child died in Year 1 (approximately x years
before Year 2).

For Year 2 through Year 5, Taxpayer and Spouse timely filed Forms 709, United States
Gift (and Generation-Skipping Transfer Tax) Returns, reporting the gifts for which each
elected to treat as made one-half by each (as provided under § 2513). On his and her
respective Forms 709, Taxpayer and Spouse allocated GST exemption (as provided in
§ 2631) to the reported gifts to Grandchild A and Grandchild B.

On his and her respective Forms 709 filed for Year 2, Taxpayer and Spouse each
allocated $a of his or her GST exemption amount to the gifts made outright to
Grandchild A and $b of his or her GST exemption amount to the gifts made outright to
Grandchild B. On his and her respective Forms 709 filed for Year 3, Taxpayer and
Spouse each allocated $c of his or her GST exemption amount to the gifts made
outright to Grandchild A and $d of his or her GST exemption amount to the gifts made
outright to Grandchild B. On his and her respective Forms 709 filed for Year 4,
Taxpayer and Spouse each allocated $e of his or her GST exemption amount to the
gifts made outright to Grandchild A and $f of his or her GST exemption amount to the
gifts made outright to Grandchild B. On his and her respective Forms 709 filed for
Year 5, Taxpayer and Spouse each allocated $g of his or her GST exemption amount to
the gifts made outright to Grandchild A and $h of his or her GST exemption amount to
the gifts made outright to Grandchild B.

Taxpayer died on Date. The personal representative of his estate requests a ruling that
the allocations of GST exemptions to the gifts made outright to Grandchild A and
Grandchild B in Year 2 through Year 5 are void because there was no GST potential
with respect to those transfers.
PLR-143964-14 3

Law and Analysis

Section 2601 imposes a tax on every GST. A GST is defined under § 2611(a) as (1) a
taxable distribution, (2) a taxable termination, and (3) a direct skip.

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 a natural person
assigned to a generation which is 2 or more generations below the generation
assignment of the transferor.

Section 2623 provides that the taxable amount in the case of a direct skip shall be the
value of the property received by the transferee.

Section 2631(a) provides, in part, that 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 subsection (a), once made, shall be
irrevocable.

Section 2631(c) provides that, for purposes of subsection (a), the GST exemption
amount for any calendar year shall be equal to the basic exclusion amount under
§ 2010(c) for such calendar year.

Section 2651(b)(1) provides that an individual who is a lineal descendant of a
grandparent of the transferor shall be assigned to that generation which results from
comparing the number of generations between the grandparent and such individual with
the number of generations between the grandparent and the transferor.

Section 2651(e)(1) provides that, for purposes of determining whether any transfer is a
GST, if—

(A) an individual is a descendant of a parent of the transferor (or the
transferor’s spouse or former spouse), and

(B) such individual's parent who is a lineal descendant of the parent of the
transferor (or the transferor’s spouse or former spouse) is dead at the time
the transfer (from which an interest of such individual is established or
derived) is subject to a tax imposed by chapter 11 or 12 of the Code upon
the transferor,
PLR-143964-14 4

such individual shall be treated as if such individual were a member of the generation
which is 1 generation below the lower of the transferor's generation or the generation
assignment of the youngest living ancestor of such individual who is also a descendant
of the parent of the transferor (or the transferor’s spouse or former spouse), and the
generation assignment of any descendant of such individual shall be adjusted
accordingly.

Section 26.2632-1(b)(4)(i) of the Generation-skipping Transfer Tax Regulations
provides, in part, that, with respect to a timely allocation, an allocation of GST
exemption becomes irrevocable after the due date of the return. An allocation of GST
exemption to a trust is void to the extent the amount allocated exceeds the amount
necessary to obtain an inclusion ratio of zero with respect to the trust. An allocation is
also void if the allocation is made with respect to a trust that has no GST potential with
respect to the transferor making the allocation, at the time of the allocation. For this
purpose, a trust has GST potential even if the possibility of a GST is so remote as to be
negligible.

Section 26.2651-1(a) provides that this paragraph (a) applies for purposes of
determining whether a transfer to or for the benefit of an individual who is a descendant
of a parent of the transferor (or the transferor's spouse or former spouse) is a
generation-skipping transfer. If that individual's parent, who is a lineal descendant of
the parent of the transferor (or the transferor's spouse or former spouse), is deceased at
the time the transfer (from which an interest of such individual is established or derived),
is subject to the tax imposed on the transferor by chapter 11 or 12 of the Code, the
individual is treated as if that individual were a member of the generation that is one
generation below the lower of—

(i) The transferor's generation; or

(ii) The generation assignment of the individual's youngest living lineal
ancestor who is also a descendant of the parent of the transferor (or the
transferor's spouse or former spouse).

Section 26.2651-1(c), Example 1, states that T establishes an irrevocable trust, Trust,
providing that trust income is to be paid to T's grandchild, GC, for 5 years. At the end of
the 5-year period or on GC's prior death, Trust is to terminate and the principal is to be
distributed to GC if GC is living or to GC's children if GC has died. The transfer that
occurred on the creation of the trust is subject to the tax imposed by chapter 12 of the
Code and, at the time of the transfer, T's child, C, who is a parent of GC, is deceased.
GC is treated as a member of the generation that is one generation below T's
generation. As a result, GC is not a skip person and Trust is not a skip person.
Therefore, the transfer to Trust is not a direct skip. Similarly, distributions to GC during
the term of Trust and at the termination of Trust will not be GSTs.
PLR-143964-14 5

In this case, Taxpayer and Spouse’s transfers to Grandchild A and Grandchild B were
made outright rather than in trust. At the time of the initial transfers in Year 2 by
Taxpayer and Spouse to Grandchild A and Grandchild B, Child, who was the parent of
Grandchild A and Grandchild B, had been deceased for approximately x years. In these
circumstances, Grandchild A and Grandchild B are treated as members of the
generation that is one generation below the generation of Taxpayer and Spouse. See
§ 2651(e).

Consequently, Grandchild A and Grandchild B were not skip persons with respect to
Taxpayer and Spouse at the time of the transfers, and the transfers to Grandchild A and
Grandchild B were not direct skips. In these circumstances, the transfers to
Grandchild A and Grandchild B had no GST potential at the time of the transfers.
Accordingly, the allocations of GST exemption made on the Forms 709 reporting the
transfers to Grandchild A and Grandchild B in Year 2 through Year 5 are void. See
§ 26.2632-1(b)(4)(i).

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

Except as specifically ruled herein, we express no opinion on the federal tax
consequences of the transaction under the cited provisions or under any other
provisions of the Code.

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

                                     Sincerely,



                                     Karlene Lesho
                                     Senior Technical Reviewer, Branch 4
                                     Associate Chief Counsel
                                     (Passthroughs and Special Industries)

Enclosure
Copy for § 6110 purposes