Estates granted relief for GST elections and trust severances

Plain-English summary

A tax professional mistakenly reported gifts to two trusts as outright gifts to the donors' children, causing the married donors to miss elections out of automatic generation-skipping transfer exemption allocations. After both donors died, another professional made a partial reverse QTIP election and GST exemption allocations on estate-tax returns but failed to divide the marital and family trusts into exempt and nonexempt shares. The estates sought relief to correct all three problems. The IRS granted 120 days to file supplemental gift-tax returns electing out of the deemed GST allocations. It also granted 120 days to sever both trusts on a fractional basis and report the severances on supplemental estate-tax returns, allowing the reverse QTIP election and GST allocations to work for the resulting exempt trusts.

Ruling snapshot

• Question: Could the estates correct missed GST allocation elections and late severances of marital and family trusts?
• Outcome: Approved, 120-day relief for all three requested corrections
• Key authorities: IRC §§ 2632(c), 2642(g), and 2652(a)(3); Treas. Reg. §§ 26.2654-1(b) and 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201622013                                              Third Party Communication: None
Release Date: 5/27/2016                                        Date of Communication: Not Applicable
Index Number: 2632.00-00, 2652.01-02,
              9100.00-00                                       Person To Contact:
                                                               ------------------------------, ID No. ------------
---------------------                                          ----------------
------------------------------------------------------------   Telephone Number:
--------------                                                 --------------------
-------------------                                            Refer Reply To:
---------------------------------                              CC:PSI:B04
                                                               PLR-129719-15
In Re: --------------------------------------------------- Date:
------------------------------------------------------------ February 01, 2016
------------------------------------------------------------




Legend:

Taxpayer 1                            =    -----------------------------------------
Taxpayer 2                            =    -----------------------------------
Daughter                              =    ----------------------
Son                                   =    -------------------------
Daughter’s Trust                      =    ------------------------------------------------------
Son’s Trust                           =    --------------------------------------------------------
Year 1                                =    ------
Year 2                                =    ------
Year 3                                =    ------

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

      This letter responds to your authorized representative’s letter of
September 8, 2015, requesting rulings under § 2642(g) and § 2652(a)(3) of the Internal
Revenue Code, § 26.2654-1 of the Generation-Skipping Transfer Tax Regulations, and
§ 301.9100-3 of the Procedure and Administration Regulations.

       The facts submitted and the representations made are as follows. In Year 1 (a
year after December 31, 2001) Taxpayer 1 created Daughter’s Trust. In Year 2,
Taxpayer 1 created Son’s Trust. Both trusts have GST tax potential. In Year 2,
Taxpayer 1 made gifts to both trusts.

        Taxpayer 1 and Taxpayer 2 retained a tax professional to prepare their
respective Form 709, United States Gift (and Generation-Skipping Transfer) Tax
Returns, to report the gifts. On these returns Taxpayer 1 and Taxpayer 2 elected to
treat gifts made by either as made by both under § 2513. The tax professional
PLR-129719-15                                2

inadvertently reported the gifts as made outright to Daughter and Son instead of made
to Daughter’s Trust and Son’s Trust. As a result, Taxpayer 1 and Taxpayer 2 failed to
elect out of the deemed allocation of generation-skipping transfer (GST) exemption to
the gifts by § 2632(c)(1) on their respective Form 709.

     Taxpayer 1 and Taxpayer 2 died in Year 3, with Taxpayer 2 predeceasing
Taxpayer 1. The failure to correctly report the Year 2 gifts and to elect out of the
deemed allocation of GST exemption by § 2632(c)(1) was discovered after their deaths.

        Prior to their deaths, Taxpayer 1 and Taxpayer 2 each created a revocable trust
and a will that provided that the bulk of their estates are distributed pursuant to the
terms of their respective revocable trust. Paragraph 4.1(a)(2) of Taxpayer 2’s revocable
trust provides for the creation of a marital trust for the benefit of Taxpayer 1. Paragraph
6.4(l) permits the trustee to divide any trust into two or more trusts for any tax or other
purpose.

      Paragraph 4.1(b)(2)(v) of Taxpayer 1’s revocable trust provides that certain
property is to be contributed to a family trust the terms of which are set forth in
paragraph 4.6, in the event Taxpayer 2 predeceases Taxpayer 1. Paragraph 6.4(l)
permits the trustee to divide any trust into two or more trusts for any tax or other
purpose.

       The personal representative of the estates of Taxpayer 1 and Taxpayer 2
retained a tax professional to prepare the Form 706, United States Estate (and
Generation-Skipping Transfer) Tax Return, for each estate.

       On the Form 706 for Taxpayer 2’s estate the tax professional made the qualified
terminal interest property (QTIP) election for property funding the marital trust
established under paragraph 4.1(a)(2) of Taxpayer 2’s revocable trust. The tax
professional also made a reverse QTIP election under § 2652(a)(3) for a portion of this
property describing this property as held in a GST exempt marital trust on the Form 706.
The tax professional, however, failed to sever the marital trust into a GST exempt and
nonexempt marital trust, thus creating the GST exempt marital trust. On the Form 706
for Taxpayer 1’s estate the tax professional allocated Taxpayer 1’s available GST
exemption to a trust described as the GST exempt family trust on the Form 706. The
tax professional, however, failed to sever the family trust established by paragraph 4.6
into a GST exempt and nonexempt family trust, thus creating the GST exempt family
trust.

       The personal representative is requesting the following rulings.

      (1) An extension of time under § 301.9100-3 to elect out of the deemed allocation
of GST exemption by § 2632(c)(1) to the gifts made to Daughter’s Trust and Son’s Trust
in Year 2.
PLR-129719-15                                3


        (2) An extension of time under § 301.9100-3 to retroactively sever, on a fractional
basis, the marital trust created under paragraph 4.1(a)(2) of Taxpayer 2’s revocable
trust into a GST exempt and nonexempt marital trust under § 26.2654-1(b), to make a
retroactive reverse QTIP election under § 2652(a)(3) with respect to the exempt trust in
the correct amount of Taxpayer 2’s remaining GST exemption, and to make a
retroactive allocation of GST exemption to the exempt trust in the correct amount of
Taxpayer 2’s remaining GST exemption.

       (3) An extension of time under § 301.9100-3 to retroactively sever, on a fractional
basis, the family trust established by paragraph 4.6 of Taxpayer 1’s revocable trust into
a GST exempt and nonexempt family trust under § 26.2654-1(b) and to make a
retroactive allocation of GST exemption to the exempt trust in the correct amount of
Taxpayer 1’s remaining GST exemption.

Law:

     Section 2001(a) imposes a tax on the transfer of the taxable estate of every
decedent who is a citizen or resident of the United States.

       Section 2056(a) provides that, for purposes of the tax imposed by § 2001, the
value of the taxable estate is to be determined by deducting from the value of the gross
estate an amount equal to the value of any interest in property that passes or has
passed from the decedent to the surviving spouse.

        Section 2056(b)(1) provides the general rule that no deduction shall be allowed
for an interest passing to the surviving spouse if, on the lapse of time, on the occurrence
of an event or contingency, or on the failure of an event or contingency to occur, the
interest will terminate or fail and (A) an interest in such property passes or has passed
(for less than an adequate and full consideration in money or money’s worth) from the
decedent to any person other than the surviving spouse (or the estate of such spouse);
and (B) if by reason of such passing such person (or his heirs or assigns) may possess
or enjoy any part of such property after such termination or failure of the interest so
passing to the surviving spouse.

      Section 2056(b)(7)(A) provides that, in the case of qualified terminable interest
property, the entire property shall be treated as passing to the surviving spouse for
purposes of § 2056(a), and no part of the property shall be treated as passing to any
person other than the surviving spouse for purposes of § 2056(b)(1).

       Section 2056(b)(7)(B)(i) defines “qualified terminable interest property” (QTIP) as
property: (1) which passes from the decedent; (2) in which the surviving spouse has a
qualifying income interest for life; and (3) to which an election under § 2056(b)(7)(B)(v)
applies.
PLR-129719-15                                 4


      Section 2056(b)(7)(B)(v) provides that an election under § 2056(b)(7) with
respect to any property shall be made by the executor on the return of tax imposed by
§ 2001. The election, once made, is irrevocable.

       Under § 2044(a), any property in which the decedent possessed a qualifying
income interest for life and for which a deduction was allowed under § 2056(b)(7) is
includable in the decedent’s gross estate.

        Section 2513(a) provides generally that, for gift tax purposes, if the parties
consent, a gift made by one spouse to any person other than his or her spouse shall, for
gift tax purposes, be considered as made one-half by the donor spouse and one-half by
his or her spouse.

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

       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).

       Section 2632(c)(5) provides that an individual (i) may elect to have § 2632(c) not
apply to (I) an indirect skip, or (II) any or all transfers made by such individual to a
particular trust.

       Section 2632(c)(5)(B)(i) provides that an election under § 2632(c)(5)(A)(i)(I) shall
be deemed to be timely if filed on a timely filed gift tax return for the calendar year in
which the transfer was made or deemed to have been made pursuant to § 2632(c)(4) or
on such later date or dates as may be prescribed by the Secretary.

     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)(C) provides, in part, that to elect out of the deemed
allocation of GST exemption to an indirect skip, 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
PLR-129719-15                                 5

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.

       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 chapter 13.

        Section 2652(a)(3) provides that in the case of any trust with respect to which a
deduction is allowed to the decedent’s estate under § 2056(b)(7), the estate of the
decedent may elect to treat all of the property in the trust, for purposes of the GST tax,
as if the QTIP election had not been made. This election is referred to as the reverse
QTIP election. The consequence of a reverse QTIP election is that the decedent
remains, for GST tax purposes, the transferor of the QTIP trust for which the election is
made. As a result, the decedent’s GST exemption may be allocated to the QTIP trust.

       Section 26.2652-2(b) provides that the reverse QTIP election is to be made on
the return on which the QTIP election is made.

        Section 26.2654-1(b)(1)(ii) provides that the severance of a trust that is included
in the transferor’s gross estate (or created under the transferor’s will) into two or more
trusts is recognized for purposes of chapter 13 if the governing instrument does not
require or otherwise direct severance but the trust is severed pursuant to discretionary
authority granted either under the governing instrument or under local law; and

        (A) The terms of the new trusts provide in the aggregate for the same succession
of interests and beneficiaries as are provided in the original trust;

      (B) The severance occurs (or a reformation proceeding, if required, is
commenced) prior to the date prescribed for filing the federal estate tax return (including
extensions actually granted) for the estate of the transferor; and
PLR-129719-15                                 6

       (C) Either -

       (1) The new trusts are severed on a fractional basis. If severed on a fractional
basis, the separate trusts need not be funded with a pro rata portion of each asset held
by the undivided trust. The trusts may be funded on a non pro rata basis provided
funding is based on either the fair market value of the assets on the date of funding or in
a manner that fairly reflects the net appreciation or depreciation in the value of the
assets measured from the valuation date to the date of funding; or

       (2) If the severance is required (by the terms of the governing instrument) to be
made on the basis of a pecuniary amount, the pecuniary payment is satisfied in a
manner that would meet the requirements of § 26.2654-1(a)(1)(ii) if it were paid to an
individual.

        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 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 § 301.9100-1 through 301.9100-3.

        Sections 301.9100 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)(v) provides, in part, that except as provided in
§ 301.9100-3(b)(3)(i) through (iii), 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.
PLR-129719-15                                 7


Ruling 1:

       Based on the facts submitted and representations made, we conclude that the
requirements of § 301.9100-3 are satisfied. Therefore, personal representative is
granted an extension of time of 120 days from the date of this letter to elect out of the
deemed allocation of GST exemption by § 2632(c)(1) for the gifts to Daughter’s Trust
and Son’s Trust in Year 2.

       The elections should be made on supplemental Forms 709 for Year 2 and filed
with the Internal Revenue Service Center Cincinnati Service Center - Stop 82,
Cincinnati, OH 45999. A copy of this letter should be attached to each the
supplemental Form 709.

Ruling 2:

        In this case, as a result of the QTIP election made on the Form 706, the property
in the marital trust is includible in Taxpayer 1’s gross estate pursuant to § 2044.
Taxpayer 1, accordingly, is the transferor of the property in the marital trust for GST tax
purposes. The reverse QTIP election made on the Form 706 is not effective because it
was not made for all of the property in marital trust. However, if the marital trust is
severed in a manner consistent with § 26.2654-1(b)(1)(ii) into two trusts, a GST exempt
and nonexempt marital trust, and the value of the property in the GST exempt marital
trust is equal to the remaining GST exemption of Taxpayer 2, the reverse QTIP election
will be effective for the resulting GST exempt marital trust.

       Based on the facts submitted and the representations made, we conclude that
the requirements of § 301.9100-3 have been satisfied. Therefore, the personal
representative is granted an extension of time of 120 days from the date of this letter to
sever the marital trust in a manner consistent with the requirements of § 26.2654-
1(b)(1)(ii) into a GST exempt and nonexempt marital trust as described herein.

      The severance should be reported on a supplemental Form 706 for the estate of
Taxpayer 2. The supplemental Form 706 should be filed with the Internal Revenue
Service Center, Cincinnati, Ohio 45999. A copy of this letter should be attached to the
supplemental Form 706.

Ruling 3:

       In this case, on the Form 706 for Taxpayer 1’s estate, the tax professional
allocated Taxpayer 1’s available GST exemption to a trust described as the GST
exempt family trust on that form but failed to sever the family trust into a GST exempt
and nonexempt family trust. If the family trust is severed in a manner consistent with
§ 26.2654-1(b)(1)(ii) into two trusts, a GST exempt and nonexempt family trust, and the
PLR-129719-15                                8

value of the property in the GST exempt family trust is equal to the remaining GST
exemption of Taxpayer 1, the allocation will be effective for the resulting GST exempt
family trust.

       Based on the facts submitted and the representations made, we conclude that
the requirements of § 301.9100-3 have been satisfied. Therefore, the personal
representative is granted an extension of time of 120 days from the date of this letter to
sever the family trust in a manner consistent with the requirements of § 26.2654-
1(b)(1)(ii) into a GST exempt and nonexempt family trust.

      The severance should be reported on a supplemental Form 706 for the estate of
Taxpayer 1. The supplemental Form 706 should be filed with the Internal Revenue
Service Center, Cincinnati, Ohio 45999. A copy of this letter should be attached to the
supplemental Form 706.

      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,


                                      Melissa C. Liquerman
                                      Melissa C. Liquerman
                                      Branch Chief, Branch 4
                                      (Passthroughs & Special Industries)

Enclosures: Copy for § 6110 purposes


cc: