Spouses receive 120 days to opt out of automatic GST allocations

Plain-English summary

A married couple made split gifts over several years to five irrevocable trusts with generation-skipping potential. Their attorney prepared the gift tax returns but did not advise them about the automatic allocation of generation-skipping transfer tax exemption or the option to elect out. As a result, GST exemption was automatically allocated to the trust transfers. The IRS found that the couple reasonably relied on a qualified tax professional and satisfied the standards for relief. It granted 120 days to file amended Forms 709 electing out of the automatic allocation rules for all covered transfers to the five trusts.

Ruling snapshot

• Question: May the spouses make late elections out of automatic GST exemption allocation for transfers to five trusts?
• Outcome: approved (120-day extension granted)
• Key authorities: IRC §§ 2513, 2601, 2611, 2631, 2632(c), 2642(g); Treas. Reg. §§ 26.2632-1, 301.9100-1, 301.9100-3; Notice 2001-50

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202017010                                              Third Party Communication: None
 Release Date: 4/24/2020                                        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:B04
                                                                PLR-115311-19
                                                                Date:
                                                                November 25, 2019

 In Re: --------------------




Legend

Date 1                       =        ------------------------
Year 1                       =        -------
Donor                        =        --------------------
                             -------------------------
Husband                      =        --------------------
                             ------------------------
Trust 1                      =        ------------------------------------------------------------------
                             -----------------------
Beneficiary 1                =        ---------------------
Trust 2                      =        ------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
                             -----------------------
Beneficiary 2                =        ----------------------------
Date 2                       =        ------------------
Trust 3                      =        ------------------------------------------------------------
                             -----------------------
Beneficiary 3                =        --------------------
Trust 4                      =        ------------------------------------------------------------
                                      -----------------------
Beneficiary 4                =        --------------------
Date 3                       =        -----------------------
Year 2                       =        -------
Trust 5                      =        --------------------------------------------------------------------
                                      -----------------------
Year 3                       =        -------
Beneficiary 5                =        -----------------------

PLR-115311-19                                     2

Attorney                  =   ---------------------
Family Office             =   --------------------------------------


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

       This letter responds to your personal representative’s letter of June 26, 2019,
requesting an extension of time under § 2642(g) of the Internal Revenue Code (Code)
and § 301.9100-1 and § 301.9100-3 of the Procedure and Administration Regulations to
elect out of the generation-skipping transfer (GST) exemption automatic allocation rules
with respect to certain transfers to trusts.

        The facts and representations submitted are as follows:

       On Date 1, in Year 1, a date after December 31, 2000, Donor and Husband
(Taxpayers) established Trust 1, an irrevocable trust, for the benefit of Beneficiary 1.
Trust 1 has GST potential.

       Also on Date 1, Taxpayers established Trust 2, an irrevocable trust, for the
benefit of Beneficiary 2. Trust 2 has GST potential.

       On Date 2, in Year 1, Taxpayers established Trust 3, an irrevocable trust, for the
benefit of Beneficiary 3. Trust 3 has GST potential.

       Also on Date 2, Taxpayers established Trust 4, an irrevocable trust, for the
benefit of Beneficiary 4. Trust 4 has GST potential.

       On Date 3, in Year 2, a date after December 31, 2000, Taxpayers established
Trust 5, an irrevocable trust, for the benefit of Beneficiary 5. Trust 5 has GST potential.

       From Year 1 to Year 3, years after December 31, 2000, Donor transferred
property to Trust 1, Trust 2, Trust 3 and Trust 4. From Year 2 to Year 3, Donor
transferred property to Trust 5.

        Taxpayers relied upon Attorney at Family Office to prepare for each a separate
Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return reporting
the transfers from Year 1 to Year 3. On each form, Taxpayers signified their consent to
treat the transfers occurring from Year 1 to Year 3 as having been made one-half by
each under § 2513 of the Code. Attorney failed to advise Taxpayers of the rules under
§ 2632(c) regarding the automatic allocation of GST exemption and the ability to elect
out of the automatic allocation of GST exemption by making an election under
§ 2632(c)(5). As a result, Taxpayers did not elect to opt out of the automatic allocation
of GST exemption for the transfers to Trust 1, Trust 2, Trust 3, Trust 4 and Trust 5.

PLR-115311-19                                 3

       GST exemption was automatically allocated to transfers to Trust 1, Trust 2,
Trust 3 and Trust 4 in Year 1, and in subsequent years through Year 3, as a result of
Taxpayers’ failure to elect out of the GST automatic allocation rules for Trust 1, Trust 2,
Trust 3 and Trust 4. Additionally, GST exemption was automatically allocated to
transfers to Trust 5 in Year 2, and in subsequent years through Year 3, as a result of
Taxpayers’ failure to elect out of GST exemption automatic allocation rules for Trust 5.

       Taxpayers request an extension of time under § 2642(g), § 301.9100-1 and
§ 301.9100-3 to elect out of automatic allocation of GST exemption for all transfers to
Trust 1, Trust 2, Trust 3, Trust 4 and Trust 5 under § 2632(c)(5)(A)(i)(II).

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 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)(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).

      Section 2632(c)(5)(A)(i)(II) provides that an individual may elect to have
§ 2632(c)(1) not apply to any and all transfers made to a particular trust.

PLR-115311-19                                 4


       Section 26.2632-1(b)(2)(iii)(A) of the Generation-Skipping Transfer Tax
Regulations provides, in relevant part, that a transferor may prevent (1) 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 and (2) the automatic
allocation of GST exemption (elect out) with respect to all future 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
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: (1) for a transfer subject to § 2642(f), the ETIP closes; or (2) for
all other elections out, the first transfer to be covered by the election out was made.

        Section 26.2632-1(b)(2)(iii)(D) provides, in part, that an election out does not
affect the automatic allocation of GST exemption to any transfer not covered by the
election out statement. An election out does not prevent the transferor from allocating
the transferor's available GST exemption to any transfer covered by the election out,
either on a timely filed Form 709 reporting the transfer or at a later date in accordance
with the provisions of paragraph (b)(4) of this section.

       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.

PLR-115311-19                                  5

       Sections 301.9100-1 through 301.9100-3 of the Procedure and Administration
Regulations provide the standards the Commissioner will use to determine whether to
grant an extension of time to make an election. 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, a taxpayer 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
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 have been satisfied. Accordingly, Taxpayers are granted
an extension of time of 120 days from the date of this letter to elect out of the automatic
allocation rules with respect to all transfers Taxpayers made (or are treated as having
made under § 2513) to Trust 1, Trust 2, Trust 3, Trust 4 and Trust 5.

       Each election should be made on an amended Form 709 and filed with the
Kansas City Service Center, at the following address: Department of the Treasury,
Internal Revenue Service Center, Kansas City, MO 64999. A copy of this letter should
be attached to the Form 709.

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

       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.

      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.

PLR-115311-19                                  6

      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.

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


                                           Sincerely,

                                           Associate Chief Counsel
                                           Passthroughs and Special Industries



                                           Melissa C. Liquerman
                                    By:    Melissa C. Liquerman
                                           Branch Chief, Branch 4
                                           Office of the Associate Chief Counsel
                                           (Passthroughs and Special Industries)

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


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