Estate received 120 days to sever a trust for GST exemption allocation

Plain-English summary

A decedent's revocable trust directed tax-efficient use of the generation-skipping transfer tax exemption and favored trusts with inclusion ratios of either zero or one. The estate's law and accounting firms did not advise the executors to divide the residuary trust into GST-exempt and non-exempt shares, and the filed estate tax return contained Schedule R errors. The IRS found that the estate satisfied the standards for regulatory-election relief based on reasonable reliance on qualified tax professionals. It granted 120 days to sever the residuary trust in accordance with Treasury Regulation Section 26.2654-1(b)(1)(ii). The IRS also ruled that Section 2632(e)'s automatic allocation rules would allocate the decedent's unused GST exemption to the GST-exempt trust. The estate had to report the severance on a supplemental Form 706 and attach the ruling.

Ruling snapshot

• Question: Could the estate obtain extra time to divide the residuary trust into GST-exempt and non-exempt shares and apply the automatic GST exemption allocation?
• Outcome: Approved, with a 120-day extension and supplemental Form 706 filing.
• Key authorities: IRC §§ 2631, 2632(e), 2642, and 2654; Treas. Reg. §§ 26.2632-1(d)(2), 26.2654-1(b)(1)(ii), 301.9100-1, and 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201825023                                              Third Party Communication: None
Release Date: 6/22/2018                                        Date of Communication: Not Applicable
Index Number: 9100.00-00, 2642.00-00,
              2654.03-00                                       Person To Contact:
                                                               ----------------, ID No. ------------------
------------------------------------------                     Telephone Number:
------------                                                   ----------------------
--------------------------------------------                   Refer Reply To:
-------------------------------------                          CC:PSI:04
                                                               PLR-133639-17
         RE: ------------------------------------              Date:
                                                               March 23, 2018




LEGEND

Date 1                       =    ------------------------
Date 2                       =    -----------------------
Decedent                     =    ----------------------------------------------------------
Revocable Trust              =    -----------------------------------------------------------------------------------
Date 3                       =    -------------------------
Individual A                 =    --------------------------
Individual B                 =    --------------------------------
Individual C                 =    -----------------
Residuary Trust              =    ----------------------------------------------------------------------
Law Firm                     =    --------------------------------------------
Accounting Firm              =    ----------------------------------------
Date 4                       =    --------------------
x                            =    ------------



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

       This letter responds to your authorized representative’s letter of
October 30, 2017, and subsequent correspondence, requesting an extension of time
under §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations
to sever a trust under § 26.2654-1(b)(1) of the Generation-Skipping Transfer (GST) Tax
Regulations.

FACTS

         The facts and representations submitted are summarized as follows:
PLR-133639-17                                2

       On Date 1, Decedent executed Revocable Trust. On Date 2, Decedent executed
the tenth amended and restated declaration of Revocable Trust. Revocable Trust
became irrevocable upon Decedent’s death on Date 3. Decedent was survived by
children and further lineal descendants. Decedent was the initial trustee of
Revocable Trust. Individual A, Individual B, and Individual C are the current trustees of
Revocable Trust and executors under § 2203.

       Article Five, Paragraph 8 of Revocable Trust generally provides that, after certain
specific bequests, the residue of Revocable Trust is to be held in further trust known as
Residuary Trust. Residuary Trust has GST tax potential.

       Article Seven, Paragraph 24 directs the trustee to divide any trust created under
Revocable Trust into two separate subtrusts of equal or unequal value whenever, in the
trustee’s discretion, the division is necessary or desirable to minimize transfer or other
taxes.

        Article Eleven, Paragraph 5 provides that all provisions of Revocable Trust shall
be construed in a manner consistent with Decedent’s objective of efficiently using
available GST tax exemptions, and, to the extent possible, of creating and maintaining
trusts that have inclusion ratios either of zero or of one and are thus either entirely
exempt or entirely non-exempt.

        The executors of Decedent’s estate engaged Law Firm to prepare Decedent’s
Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return.
Accounting Firm was retained to advise Decedent’s estate as to income tax issues
arising by reason of Decedent’s death. During the administration of Decedent’s estate,
Law Firm and Accounting Firm met with the executors to discuss distributions to
children and grandchildren under the terms of Revocable Trust. However, Law Firm
and Accounting Firm did not advise Decedent’s estate that any gifts or distributions to
grandchildren would have a GST impact. Moreover, Decedent’s estate was not advised
to divide Residuary Trust into two separate trusts, a GST Exempt Residuary Trust and a
GST Non-Exempt Residuary Trust, to effectuate Decedent’s GST planning as directed
under the terms of Revocable Trust.

       On Date 4, Form 706 was timely filed on behalf of Decedent’s estate. The
Form 706 did not evidence any intent to divide Residuary Trust into the GST Exempt
Residuary Trust and GST Non-Exempt Residuary Trust. Moreover, there were several
reporting and computational errors on Schedule R of Form 706. It is represented that
Decedent had previously allocated $x to skip persons during Decedent’s lifetime and
had remaining GST exemption available.

     You have requested an extension of time to sever Residuary Trust into a
GST Exempt Residuary Trust and a GST Non-Exempt Residuary Trust and a ruling that
PLR-133639-17                                3

the automatic allocation rules of § 2632(e) will operate to cause the unused portion of
Decedent’s GST exemption to be allocated to the GST Exempt Residuary Trust.

LAW AND ANALYSIS

       Section 2601 imposes a tax on every generation-skipping transfer.
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 GST tax is determined by
multiplying the taxable amount by the applicable rate. Section 2641(a) provides that the
term “applicable rate” means, with respect to any GST transfer, the product of the
maximum federal estate tax rate and the inclusion ratio with respect to the transfer.

       Section 2642(a)(1) provides that, generally, the inclusion ratio with respect to any
property transferred in a GST is the excess of one over the applicable fraction
determined for the trust. Section 2642(a)(2) provides that, in general, the applicable
fraction is a fraction the numerator of which is the amount of the GST exemption
allocated to the trust and the denominator of which is the value of the property
transferred to the trust, 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) 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(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 2632(e)(1) provides that, in general, any portion of an individual’s GST
exemption which has not been allocated within the time prescribed by § 2632(a) shall
be deemed to be allocated as follows: (A) first, to property which is the subject of a
direct skip occurring at such individual’s death, and (B) second, to trusts with respect to
which such individual is the transferor and from which a taxable distribution or a taxable
termination might occur at or after such individual’s death.

       Section 26.2632-1(d)(2) of the Generation-Skipping Transfer Tax Regulations
provides that a decedent’s unused GST exemption is automatically allocated on the due
date for filing the Form 706, or Form 706NA, to the extent not otherwise allocated by the
PLR-133639-17                                 4

decedent’s executor on or before that date. Unused GST exemption is allocated pro
rata (subject to the rules of § 26.2642-2(b)), on the basis of the value of the property as
finally determined for purposes of chapter 11 (chapter 11 value), first to direct skips
treated as occurring at the transferor’s death. The balance, if any, of unused GST
exemption is allocated pro rata (subject to the rules of § 26.2642-2(b)) on the basis of
the chapter 11 value of the nonexempt portion of the trust property to trusts with respect
to which a taxable termination may occur or from which a taxable distribution may be
made. No automatic allocation of GST exemption is made to a trust that will have a
new transferor with respect to the entire trust prior to the occurrence of any GST with
respect to the trust. The automatic allocation is irrevocable.

      Section 2652(a)(1) provides that for purposes of chapter 13, the term “transferor”
means: (A) in the case of any property subject to the tax imposed by chapter 11, the
decedent; and (B) in the case of any property subject to the tax imposed by chapter 12,
the donor. An individual shall be treated as transferring any property with respect to
which such individual is the transferor.

        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

(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.
PLR-133639-17                                5

      Section 301.9100-1(c) provides that the Commissioner has discretion to grant a
reasonable extension of time under the rules set forth in §§ 301.9100-1 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 Internal
Revenue Code except subtitles E, G, H, and I.

      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).

       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 representations made, we conclude that the
requirements of § 301.9100-3 are satisfied. Therefore, Decedent’s estate is granted an
extension of time of 120 days from the date of this letter to sever Residuary Trust into a
GST Exempt Residuary Trust and a GST Non-Exempt Residuary Trust in a manner
consistent with the requirements of § 26.2654-1(b)(1)(ii). Further, the automatic
allocation rules of § 2632(e) apply to automatically allocate Decedent’s unused GST
exemption to the GST Exempt Residuary Trust.

      The severance should be reported on a supplemental Form 706 for the estate of
Decedent. 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.

       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.

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

      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
PLR-133639-17                                  6

material submitted in support of the request for rulings, it is subject to verification on
examination.

         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
                                    By: ____________________________
                                       Leslie H. Finlow
                                       Senior Technician Reviewer, Branch 4
                                       Office of Associate Chief Counsel
                                       (Passthroughs & Special Industries)




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


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