GRAT donor received 120 days to opt out of automatic GST allocation

Plain-English summary

A taxpayer transferred a company interest to a grantor retained annuity trust whose remainder would pass to a family trust after the retained annuity period ended. The taxpayer intended to preserve generation-skipping transfer exemption for future gifts, but the attorney did not explain the automatic-allocation rules or the election to opt out. The gift tax return reported the original transfer without an opt-out election, and no return was filed when the estate tax inclusion period closed. GST exemption was therefore automatically allocated at that later date. The IRS found reasonable reliance on a qualified tax professional and granted 120 days to file Form 709 electing out of automatic allocation for the transfer.

Ruling snapshot

• Question: Could the GRAT donor make a late election to prevent automatic allocation of GST exemption when the estate tax inclusion period closed?
• Outcome: approved, 120-day extension
• Key authorities: IRC §§ 2632(c)(5) and 2642(g); Treas. Reg. § 26.2632-1; Notice 2001-50

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202248001                                             Third Party Communication: None
 Release Date: 12/2/2022                                       Date of Communication: Not Applicable
 Index Number: 9100.00-00, 2642.00-00
                                                               Person To Contact:
 ----------------------                                        ---------------, ID No. -----------------
 --------------------                                          Telephone Number:
 ----------------------------------                            --------------------
 -------------------------------                               Refer Reply To:
                                                               CC:PSI:04
          RE: ----------------------                           PLR-105204-22
                                                               Date:
                                                               September 02, 2022




Taxpayer         =        ------------------------------------------------
Date 1           =        -------------------
Date 2           =        ------------------
Year 1           =        -------
Year 2           =        -------
Trust            =        -------------------------------------
x                =        ---
Company          =        -------------------------
Attorney         =        ----------------------


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

This letter responds to your personal representative’s letter of March 10, 2022, and
subsequent correspondence, 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 make an election under § 2632(c)(5) to elect out of
the generation-skipping transfer (GST) exemption automatic allocation rules with
respect to a transfer to trust.

The facts and representations submitted are as follows:

On Date 1, a date after December 31, 2000, in Year 1, Taxpayer established Trust, an
irrevocable grantor retained annuity trust (GRAT). Taxpayer funded Trust
with x percent of Company (Year 1 Transfer). Under the terms of Trust, Taxpayer’s
retained interest terminated and the remaining principal of Trust passed to a trust for the
benefit of Taxpayer’s family on Date 2 in Year 2. Thus, for GST tax purposes, the
estate tax inclusion period (ETIP) with respect to the transfer to Trust 2 closed on
Date 2 in Year 2.
PLR-105204-22                                2

Trust was created for the primary benefit of Taxpayer’s parents, Taxpayer’s siblings,
and the descendants of Taxpayer. Taxpayer did not intend to allocate GST exemption
to Trust; rather, Taxpayer intended to use his GST exemption on future transfers.

Attorney, the drafter of Trust, prepared Taxpayer’s Year 1 Form 709, United States Gift
(and Generation-Skipping Transfer) Tax Return, in order to report the Year 1 Transfer to
Trust. Attorney did not advise Taxpayer 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) on a Form 709.
Taxpayer’s gift of a membership interest in Company to Trust was incorrectly reported
on Schedule A, Part 1 (Gifts Subject Only to Gift Tax) of Taxpayer’s Year 1 Form 709
with no indication to elect out of the automatic allocation of GST exemption. No Form
709 was filed for Year 2 upon the termination of Trust, and thus no election out of the
automatic allocation of GST exemption was made. As a result, Taxpayer failed to make
an election to opt out of the automatic allocation of GST exemption to the Year 1
Transfer to Trust.

GST exemption was automatically allocated to Taxpayer’s Year 1 Transfer to Trust at
the expiration of the ETIP on Date 2 in Year 2 as a result of the failure to make an
election under § 2632(c)(5) to opt out of the automatic allocation of GST exemption for
the transfer.

Taxpayer requests an extension of time under § 2642(g) and § 301.9100-3 to elect
under § 2632(c)(5) to have the automatic allocation of GST exemption not apply to
Taxpayer’s Year 1 Transfer to Trust.

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 2602 provides that the amount of GST tax imposed by § 2601 is the taxable
amount multiplied by the applicable rate. Section 2641(a) defines the applicable rate as
the product of the maximum federal estate tax rate and the inclusion ratio with respect
to the transfer.

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
PLR-105204-22                                 3

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)(4) provides that for purposes of § 2632(c), an indirect skip to which
§ 2642(f) applies shall be deemed to have been made only at the close of the ETIP.
The fair market value of such transfer shall be the fair market value of the trust property
at the close of the ETIP.

Section 2632(c)(5)(A)(i) provides, in part, that an individual may elect to have § 2632(c)
not apply to an indirect skip or any or all transfers made by such individual to a
particular trust. Section 2632(c)(5)(B)(ii) provides that the election may be made on a
timely filed gift tax return for the calendar year for which the election is to become
effective.

Section 2642(b)(1)(A) provides 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 or is deemed to be made
under § 2632(b)(1) or (c)(1), 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)), or, in the case of an allocation deemed to have been made at the close of
an ETIP, its value at the time of the close of the ETIP.

Section 2642(f)(1) provides that, for purposes of determining the inclusion ratio, if an
individual makes an inter vivos transfer of property, and the value of such property
would be includible in the gross estate of such individual under chapter 11 if such
individual died immediately after making such transfer (other than by reason of § 2035),
any allocation of GST exemption to such property shall not be made before the close of
the ETIP (and the value of such property shall be determined under § 2642(f)(2)). If
such transfer is a direct skip, such skip shall be treated as occurring as of the close of
the ETIP.

Section 2642(f)(3) provides that, for purposes of § 2642(f), the term “estate tax inclusion
period” means any period after the transfer described in § 2642(f)(1) during which the
value of the property involved in such transfer would be includible in the gross estate of
the transferor under chapter 11 if he died.

Section 26.2632-1(b)(2)(i) of the Generation-Skipping Transfer Tax Regulations
provides that, in the case of an indirect skip made after December 31, 2000, to which
§ 2642(f) (relating to transfers subject to the estate tax inclusion period or ETIP) does
PLR-105204-22                                 4

not apply, the transferor’s unused GST exemption is automatically allocated to the
property transferred (but not in excess of the fair market value of the property on the
date of the transfer). This automatic allocation is effective whether or not a Form 709 is
filed reporting the transfer, and is effective as of the date of the transfer to which it
relates. An automatic allocation is irrevocable after the due date of the Form 709 for the
calendar year in which the transfer is made.

Section 26.2632-1(b)(2)(ii) provides that, except as otherwise provided, the transferor
may prevent the automatic allocation of GST exemption with regard to an indirect skip
by making an election as provided in § 26.2632-1(b)(2)(iii).

Section 26.2632-1(b)(2)(iii)(A) 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(c)(1)(i) provides that a direct skip or an indirect skip that is subject to
an ETIP is deemed to have been made only at the close of the ETIP. The transferor
may prevent the automatic allocation of GST exemption to a direct skip or an indirect
skip by electing out of the automatic allocation rules at any time prior to the due date of
the Form 709 for the calendar year in which the close of the ETIP occurs (whether or
not any transfer was made in the calendar year for which the Form 709 was filed, and
whether or not a Form 709 otherwise would be required to be filed for that year).

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
PLR-105204-22                                  5

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 (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.

Under § 301.9100-1(c), 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 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, Taxpayer is granted an
extension of time of 120 days from the date of this letter to make an election under
§ 2632(c)(5) that the automatic allocation rules not apply to Taxpayer’s Year 1 Transfer
to Trust. The election should be filed with the Internal Revenue 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.
PLR-105204-22                                6

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 taxpayers 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.

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 & Special Industries)

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




Enclosure
      Copy for § 6110 purposes



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