Estate granted extra time to elect out of automatic GST-exemption allocation for 2010 gifts to grandchildren's trusts

Plain-English summary

When someone makes a "direct skip" gift (for example, to a grandchild or a trust for grandchildren), the tax law automatically uses up part of the giver's generation-skipping transfer (GST) tax exemption unless the giver elects out. In 2010 the GST tax rate was temporarily zero, so this donor had no reason to use exemption on gifts made to five trusts for grandchildren, and intended to save that exemption for later. But the accountant who prepared the 2010 gift tax return (Form 709), misinformed by the attorney, reported the gifts as outright to the grandchildren rather than in trust and never advised electing out, so the automatic allocation was not prevented. After the donor died, the estate asked the IRS for more time under § 2642(g) and Treas. Reg. § 301.9100-3 to make the election to opt out. The IRS granted a 120-day extension to file an amended 2010 Form 709 electing out under § 2632(b)(3), relying on the rule that a taxpayer who reasonably relied on a tax professional who failed to make or advise the election is treated as having acted reasonably and in good faith. This lets the estate preserve GST exemption that would otherwise have been wasted at a zero tax rate.

Ruling snapshot

• Question: May an estate get an extension of time to elect out of the automatic allocation of GST exemption for the decedent's 2010 gifts to trusts?
• Outcome: approved (120-day extension to file an amended 2010 Form 709 electing out)
• Key authorities: IRC § 2632(b)(3); IRC § 2642(g); Treas. Reg. § 301.9100-3 (including reliance on a tax professional under § 301.9100-3(b)(1)(v))

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202220009 Third Party Communication: None
Release Date: 5/20/2022 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:4
------------------------------- PLR-121549-21
------------------------------ Date:
February 23, 2022

     Re: -----------------------------------

Legend

Attorney = ----------------------
Decedent = --------------------------
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x = ------------------
y = --
Trusts = --------------------------------------------------------------------------------------------
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z = --
Accountant = -----------------------
Date 1 = ------------------------
Date 2 = ------------------
PLR-121549-21 2

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

This letter responds to your authorized representative's letter dated October 15, 2021,
and subsequent correspondence, requesting an extension of time under § 2642(g) of
the Internal Revenue Code and § 301.9100-3 of the Procedure and Administration
Regulations to elect out of the generation-skipping transfer (GST) exemption automatic
allocation rules under § 2632(b)(3).

The facts and representations submitted are as follows:

Upon the advice of Attorney, Decedent transferred assets valued at $x to y irrevocable
trusts (Trusts), one for the benefit of each of y grandchildren, and assets valued at $x to
each of Decedent’s other z grandchildren in 2010. Trusts are skip persons, as defined
in § 2613(a). Decedent did not intend to allocate GST exemption to the transfers to
Trusts because the GST tax rate was zero in 2010.

Decedent timely filed a 2010 Form 709, United States Gift (and Generation-Skipping
Transfer) Tax Return, to report the gifts. As a result of Attorney’s ineffective
communication, Accountant, who prepared the Form 709, was unaware that the gifts to
y of Decedent’s grandchildren were made in trust and incorrectly reported the gifts to
Trusts as made directly to those y grandchildren. Accountant also failed to advise
Decedent of the rules under § 2632(b) regarding the automatic allocation of GST
exemption to direct skips and the ability to elect out of automatic allocation by making
an election under § 2632(b)(3). Decedent, therefore, did not elect out of automatic
allocation for the gifts to Trusts.

Decedent died on Date 1. Decedent’s Form 706, United States Estate (and Generation-
Skipping Transfer) Tax Return, is due on extension on Date 2.

Decedent's estate requests an extension of time under § 301.9100-3 to elect out of
automatic allocation of GST exemption under § 2632(b)(3) for Decedent’s 2010 gifts to
Trusts.

LAW AND ANALYSIS

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 2612(c) provides that a direct skip is a transfer subject to a tax imposed by
chapter 11 or 12 of an interest in property to a skip person.

Section 2613(a) provides that a skip person is – (1) a natural person assigned to a
generation which is 2 or more generations below the generation assignment of the
transferor, or (2) a trust – (A) if all interests in such trust are held by skip persons, or
(B) if – (i) there is no person holding an interest in such trust, and (ii) at no time after
PLR-121549-21 3

such transfer may a distribution (including distributions on termination) be made from
such trust to a non-skip person.

Section 2602 provides that the amount of GST tax is the taxable amount multiplied by
the applicable rate. Section 2641(a) defines applicable rate 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 GST is defined as the excess (if any) of 1 over the applicable fraction.
The applicable fraction, as defined in § 2642(a)(2), is 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).

Section 2631(a) provides that, for purposes of determining the inclusion ratio, every
individual is 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, is
irrevocable.

Section 2632(a)(1) provides that any allocation by an individual of 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.

Under § 2632(b)(1), if an individual makes a direct skip transfer during life, any unused
portion of such individual’s GST exemption is automatically allocated to the property
transferred to the extent necessary to make the inclusion ratio zero.

Section 2632(b)(3) provides that an individual may elect to have the automatic
allocation rule of § 2632(b)(1) not apply to a transfer.

Section 26.2632-1(b)(1)(i) of the Generation-Skipping Transfer Tax Regulations
provides, in part, that, if a direct skip occurs during the transferor's lifetime, the
transferor's GST exemption not previously allocated (unused GST exemption) is
automatically allocated to the transferred property (but not in excess of the f air market
value of the property on the date of the transfer). The transferor may prevent the
automatic allocation of GST exemption by describing on a timely-filed Form 709 the
transfer and the extent to which the automatic allocation is not to apply. In addition, a
timely filed Form 709 accompanied by payment of the GST tax is sufficient to prevent
an automatic allocation of GST exemption with respect to the transferred property.

Section 26.2632-1(b)(1)(ii) provides, in part, that a Form 709 is timely filed if it is filed on
or before the date required for reporting the transfer if it were a taxable gift (i.e., the date
prescribed by § 6075(b), including any extensions to file actually granted (the due
PLR-121549-21 4

date)). The automatic allocation of GST exemption (or the election to prevent the
allocation, if made) is irrevocable after the due date. An automatic allocation of GST
exemption is effective as of the date of the transfer to which it relates. Except as
provided above, a Form 709 need not be filed to report an automatic allocation.

Section A of Title V of the Economic Growth and Tax Relief Reconciliation Act of 2001,
P.L. 107-16, enacted § 2210 of the Code, which made chapter 13 (the GST tax)
inapplicable to GSTs made in 2010. On December 17, 2010, the Tax Relief,
Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312
(124 Stat. 3296) (TRUIRJCA), became law, and § 301 retroactively reinstated the GST
tax. However, § 302(c) of TRUIRJCA provides that the applicable rate for eac h GST
occurring during 2010 is zero.

Notice 2011-66, 2011-35 I.R.B. 184, provides that the IRS will interpret the reporting of
an inter vivos direct skip not in trust occurring in 2010 on a timely filed Form 709 as
constituting the payment of GST tax (at the rate of zero percent) and, therefore, as an
election out of the automatic allocation of GST exemption to that direct skip.

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 election under § 2632(b)(3).

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 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 (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
301.9100-2 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).
PLR-121549-21 5

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.

Under § 301.9100-3(b)(1)(v), 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 upon the facts submitted and representations made, we conclude that the
requirements of § 301.9100-3 have been satisfied. Therefore, you are granted an
extension of time of 120 days from the date of this letter to elect out of the automatic
allocation rules under § 2632(b)(3) with respect to Decedent’s 2010 gifts to Trusts. The
election should be made on an amended Form 709 for 2010 in accordance with the
Instructions for Form 709. The amended Form 709 should be filed with the Internal
Revenue Service Center at the following address: Internal Revenue Service Center,
Attn: E&G, Stop 824G, 7940 Kentucky Drive, Florence, KY 41042-2915. You should
attach a copy of this letter to the amended Form 709.

The ruling contained in this letter is 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 ruling, it is subject to verification on examination.

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.
PLR-121549-21 6

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

                                      Sincerely,

                                      Associate Chief Counsel
                                      (Passthroughs & Special Industries)



                                By:      Karlene M. Lesho
                                      Karlene M. Lesho
                                      Senior Technician Reviewer, Branch 4
                                      Office of the Associate Chief Counsel
                                      (Passthroughs & Special Industries)

Enclosure
Copy for § 6110 purposes

cc: