Spouses receive 120 days to opt out of automatic GST allocation

Plain-English summary

A husband created an irrevocable trust with three separate trusts for the couple's children and transferred cash to them. The spouses elected to split the gifts on timely Forms 709, but their accountant did not elect out of the rules that automatically allocate generation-skipping transfer tax exemption. They represented that no later additions or distributions had occurred. Because the missed elections resulted from reasonable reliance on a qualified tax professional, the IRS found that the spouses acted reasonably and in good faith and that relief would not prejudice the government. Each spouse received 120 days to file supplemental Forms 709 electing out for the transfers.

Ruling snapshot

• Question: Could spouses receive extra time to elect out of automatic GST exemption allocation for gift-split transfers to trusts with GST potential?
• Outcome: Approved; each spouse received 120 days to make the election on a supplemental Form 709.
• Key authorities: IRC §§ 2513, 2631, 2632(c), and 2642(g); Treas. Reg. §§ 26.2632-1(b)(2)(iii) and 301.9100-3; Notice 2001-50

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201927014                                              Third Party Communication: None
Release Date: 7/5/2019                                         Date of Communication: Not Applicable
Index Number: 2632.00-00, 2642.00-00,
              9100.00-00                                       Person To Contact:
                                                               -------------------------, ID No. -----------------
------------------------                                       -----------------------------------------------------
-----------------------------                                  Telephone Number:
------------------------------------------------------         ----------------------
                                                               Refer Reply To:
                                                               CC:PSI:04
                                                               PLR-135695-18
RE: --------------------------------------------               Date:
                                                               March 12, 2019


Legend

Date 1                              =        -------------------
Year                                =        -------
Husband                             =        ------------------------
                                             --------------------------
Wife                                =        -----------------------
                                             --------------------------
Trust                               =        -------------------------------------------------
Date 2                              =        ---------------------------
Accountant                          =        --------------------------



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

This letter responds to your personal representative’s letter of December 11, 2018,
requesting an extension of time under § 2642(g) of the Internal Revenue Code (Code)
and § 301.9100-3 of the Procedure and Administration Regulations to elect out of the
generation-skipping transfer (GST) tax exemption automatic allocation rules.

The facts and representations submitted are as follows:

On Date 1, in Year, a date after December 31, 2000, Husband established Trust, an
inter vivos irrevocable trust. Trust established three Separate Trusts for the benefit of
Husband’s and Wife’s (Taxpayers’) three children. All three of the Separate Trusts have
GST potential. On Date 2, also in Year, Husband made transfers of cash to each of the
Separate Trusts.

PLR-135695-18                                 2

The terms of Trust provide that each of the Separate Trusts will terminate and be
distributed to the child who is a beneficiary of such trust on the later of such child
reaching age 38 and the death of Taxpayers.

Accountant prepared and timely filed Taxpayers’ Forms 709, United States Gift (and
Generation-Skipping Transfer) Tax Returns reporting Husband’s transfers to the
Separate Trusts on Date 2. Taxpayers elected to gift-split on their Forms 709. Thus,
Taxpayers each reported half of the transfers made to the Separate Trusts on their
respective returns. Accountant did not opt out of the automatic GST allocation rules
with respect to those transfers.

Taxpayers represent that no additions have been made to any of the Separate Trusts,
and that no payments or distributions have been made from the Separate Trusts to any
beneficiary.

Taxpayers each request an extension of time pursuant to § 2642(g) and § 301.9100-3
to opt out of the automatic allocation rules with respect to Husband’s transfer to the
Separate Trusts on Date 2.

LAW AND ANALYSIS

Section 2513(a)(1) provides that a gift made by one spouse to any person other than his
spouse shall be considered as made one-half by him and one-half by his spouse, but
only if at the time of the gift each spouse is a citizen or resident of the United States.
Under § 2513(a)(2), paragraph (a)(1) only applies if both spouses have signified their
consent to the application of paragraph (a)(1) in the case of all such gifts made during
the calendar year by either while married to the other.

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 generation-
skipping transfer, as the product of the maximum federal estate tax rate and the
inclusion ratio with respect to the transfer.

Section 2641(b) provides that the term “maximum Federal estate tax rate” means the
maximum rate imposed by § 2001 on the estates of decedents dying at the time of the
taxable distribution, taxable termination, or direct skip, as the case may be.

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.” The applicable fraction, as defined in § 2642(a)(2), is a fraction,

PLR-135695-18                                  3

the numerator of which is the amount of the GST exemption under § 2631 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.

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)(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
2632(a)(2) provides that the manner in which allocations are to be made shall be
prescribed by forms or regulations issued by the Secretary.

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 is treated
as allocated to the property transferred to the extent necessary to make the inclusion
ratio for such property zero. If the amount of the indirect skip exceeds such unused
portion, the entire unused portion shall be allocated to the property transferred.

Under § 2632(c)(3)(A), 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). Under § 2632(c)(3)(B), a GST trust is a trust that could have
GST potential with respect to the transferor unless the trust satisfies any of the
exceptions listed in § 2632(c)(3)(B)(i)-(vi).

Under § 2632(c)(5)(A)(i)(I) and (II), an individual may elect to have the automatic
allocation rule in § 2632(c)(1) not apply to an indirect skip, or to any or all transfers
made by such individual to a particular trust.

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)(A)(2) of the Generation-Skipping Transfer Tax Regulations
provides, in relevant part, that a transferor may prevent the automatic allocation of GST
exemption (elect out) with respect to one or more (or all) current-year transfers made by
the transferor to a specified trust or trusts.

Section 26.2632-1(b)(2)(iii)(B) provides that to elect out, the transferor must attach an
election out statement to a Form 709 filed within the time period provided in
§ 26.2632-1(b)(2)(iii)(C). In general, the election out statement must identify the trust,
and specifically must provide that the transferor is electing out of the automatic

PLR-135695-18                                 4

allocation of GST exemption with respect to the described transfer or transfers. Under
§ 26.2632-1(b)(2)(iii)(C), to elect out, the Form 709 with the attached election out
statement must be filed on or before the due date for timely filing the Form 709 for the
calendar year in which the first transfer to be covered by the election out was made.

Section 2642(g)(1)(A) provides, generally, 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).

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.

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 generation-skipping transfer 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 § 301.9100-3.

Sections 301.9100-1 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 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

PLR-135695-18                                  5

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 § 301.9100-3 have been satisfied. Accordingly, Taxpayers are each
granted an extension of time of 120 days from the date of this letter to make an election
under § 2632(c)(5) opting out of the automatic allocation rules with respect to
Husband’s Date 2 transfers to the Separate Trusts. Each election should be made on
supplemental Forms 709 for Year. The supplemental Forms 709 should be filed with
the Cincinnati Service Center at the following address: Internal Revenue Service,
Cincinnati Service Center - Stop 82, Cincinnati, OH 45999. You should attach a copy of
this letter to the supplemental Forms 709. We have enclosed a copy for this purpose.

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 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,

                                       Office of Associate Chief Counsel
                                       (Passthroughs & Special Industries)

                                       By: Lorraine E. Gardner
                                       Lorraine E. Gardner
                                       Senior Counsel, Branch 4
                                       Office of Associate Chief Counsel
                                       (Passthroughs & Special Industries)
Enclosures (2):
Copy for § 6110 purposes
Copy of this letter


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