Estates could make late GST exemption allocations to family trusts

Plain-English summary

A married couple made gifts to two irrevocable trusts for their sons and descendants in three years before 2001. They timely filed gift tax returns and elected to split the gifts equally, but their tax professionals did not allocate either spouse's generation-skipping transfer tax exemption. After both spouses died, a CPA discovered the omission while reviewing their estates. The estates represented that the trusts had received no later additions and that each spouse had enough available GST exemption. The IRS granted 120 days to file amended Forms 709 allocating the exemptions, effective as of the original transfer dates and using the gift-tax values of the transfers.

Ruling snapshot

• Question: Could the spouses' estates retroactively allocate GST exemption to earlier transfers to the trusts?
• Outcome: Approved, with 120 days to file amended Forms 709.
• Key authorities: IRC §§ 2513, 2631, 2632, 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: 201817005 Third Party Communication: None
Release Date: 4/27/2018 Date of Communication: Not Applicable
Index Number: 2642.00-00, 9100.00-00
Person To Contact:
--------------------------------- --------------------------, ID No. ----------------
-------------------- -----------------
--------------------------------- Telephone Number:
----------------------
Refer Reply To:
CC:PSI:B04
PLR-123275-17
Date:
January 23, 2018

RE:

Legend

Decedent = -----------------------------------------------------
Spouse = --------------------------------------------------
Trust A = ----------------------------------------------------------------
Trust B = ---------------------------------------------------------------------
CPA = ------------------
Date 1 = ---------------------------
Date 2 = ----------------------------
Date 3 = ----------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------

Dear ---------------

This letter responds to your authorized representative's letter dated July 20, 2017,
requesting an extension of time under § 2642(g) of the Internal Revenue Code and
§§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to
allocate generation-skipping transfer (GST) exemption to certain transfers to trusts.

Facts

The facts and representations submitted are summarized as follows. On Date 1, a date
in Year 1, Decedent created and funded Trust A and Trust B, both irrevocable trusts, for
the benefit of Decedent’s sons and Decedent’s descendants. Decedent also made
transfers to Trusts A and B in Year 2 and Year 3. Year 1, Year 2 and Year 3 are years
prior to December 31, 2000.
PLR-123275-17 2

Decedent and Spouse filed timely Forms 709, United States Gift (and Generation-
Skipping Transfer) Tax Returns for Year 1, Year 2 and Year 3 to report the transfers to
Trusts A and B. On each form, Decedent and Spouse signified their consent to treat the
transfers as having been made one-half by each spouse under § 2513. The Forms 709
did not allocate Decedent’s and Spouse’s GST exemption to the respective transfers.
Decedent and Spouse relied on tax professionals to prepare all necessary tax returns.

Decedent died on Date 2 and Spouse died on Date 3. The failure to allocate
Decedent’s and Spouse’s GST exemption was discovered by CPA upon a review of
Decedent’s and Spouse’s respective estates. It is represented that no additions
(constructive or actual) were made to Trusts A and B after Date 1 and that Decedent
and Spouse have sufficient GST exemption to allocate to the Years 1, 2 and 3 transfers.

You request an extension of time pursuant to § 2642(g) and §§ 301.9100-1 and
301.9100-3 to allocate Decedent’s and Spouse’s GST exemption to the transfers to
Trusts A and B and that the GST exemption allocated to the transfers will be effective
as of the date of each transfer.

Law and Analysis

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 the term “applicable
rate,” with respect to any GST transfer, as the product of the maximum federal estate
tax rate and the inclusion ratio with respect to the transfer.

Section 2642(a)(1) provides that the inclusion ratio with respect to any property
transferred in a generation-skipping transfer is the excess (if any) of one over the
“applicable fraction.” Under § 2642(a)(2), the applicable fraction is defined as 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.

Section 2631(a), as in effect for Year 1, provides that, for purposes of determining the
inclusion ratio, every individual shall be allowed a GST exemption of $1,000,000 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.
PLR-123275-17 3

Section 2632(a) 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) of the Generation-Skipping Transfer Tax Regulations provides,
in part, that an allocation of GST exemption to property transferred during the
transferor’s lifetime, other than in a direct skip, is made on Form 709.

Section 2642(b)(1) provides, in part, 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, the value of such
property for purposes of § 2642(a) shall be its value as finally determined for purposes
of chapter 12 (within the meaning of § 2001(f)(2)) and such allocation will be effective
on and after the date of such transfer.

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 this
paragraph, 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 under this paragraph, 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, in part, that, under § 2642(g)(1)(B), the time
for allocating the GST exemption to lifetime transfers is to be treated as if not expressly
prescribed by statute and taxpayers may seek an extension of time to make an
allocation described in § 2642(b)(1) or (b)(2) under the provisions of § 301.9100-3.

Section 301.9100-1(c) provides that the Commissioner has discretion to grant a
reasonable extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3
to make a regulatory election, or a statutory election (but no more than six months
except in the case of a taxpayer who is abroad), under all subtitles of the Code except
subtitles E, G, H, and I.

Section 301.9100-3(a) provides that, in general, requests for extension of time for
regulatory elections that do not meet the requirements of § 301.9100-2 must be made
under the rules of § 301.9100-3.
PLR-123275-17 4

Section 301.9100-3 provides the standards used to determine whether to grant an
extension of time to make an election whose due 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.

Requests for relief under § 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 that granting relief will not prejudice the interests of
the government.

Section 301.9100-3(b)(1)(v) provides 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 §§ 301.9100-1 and 301.9100-3 have been satisfied. Therefore,
Decedent’s and Spouse’s estates are granted an extension of time of 120 days from the
date of this letter to allocate Decedent and Spouse’s available GST exemption to each
transfer to Trusts A and B. The allocations will be effective as of the respective date of
the transfers to Trusts A and B, and the value of the transfer to the Trusts as
determined for federal gift tax purposes will be used in determining the amount of
Settlor’s GST exemption to be allocated to Trusts.

This allocation should be made on an amended Form 709 and filed with the Cincinnati
Service Center at the following address: Internal Revenue Service, Cincinnati Service
Center – Stop 82, Cincinnati, OH 45999. A copy of this letter should be attached to the
supplemental Forms 709.

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 or imply no opinion on the federal tax
consequences of the transaction under the cited provisions or under any other
provisions of the Code.
PLR-123275-17 5

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

                                       Sincerely,

                                       Associate Chief Counsel
                                       (Passthroughs & Special Industries)


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

Enclosures (2)
Copy of this letter
Copy for § 6110 purposes

cc: