Donor gets more time to allocate GST exemption after accountant let him opt out by mistake

Plain-English summary

The generation-skipping transfer (GST) tax applies when wealth passes to grandchildren or more remote descendants, but each person has a GST exemption they can allocate to a trust to shield it from that tax. Here a donor set up an irrevocable trust intended to benefit grandchildren and later descendants and made gifts to it. The donor relied on an attorney to prepare the gift tax return (Form 709), but the attorney did not explain the effect of electing out of the automatic allocation of GST exemption. As a result the donor opted out, and no exemption was allocated to the trust, leaving the transfers exposed to GST tax. The donor asked the IRS for an extension of time under section 2642(g) and its regulations, which let the IRS grant relief when the taxpayer acted reasonably and in good faith (including reasonable reliance on a tax professional) and relief will not prejudice the government. The IRS granted a 120-day extension to allocate the GST exemption to the trust transfers, to be done on an amended Form 709. The IRS expressly gave no opinion on some collateral estate-tax questions (for example, whether the donor's retained powers could pull the trust back into the donor's estate). This is a routine fix for a missed GST exemption allocation caused by a preparer's oversight. (It closely tracks the companion ruling PLR 202507003; here the trust also gives the surviving spouse a testamentary power of appointment.)

Ruling snapshot

• Question: Should the donor get an extension of time under § 2642(g) to allocate GST exemption to earlier transfers to the trust after mistakenly electing out of automatic allocation?
• Outcome: Approved (120-day extension to allocate on an amended Form 709)
• Key authorities: IRC §§ 2642(g), 2631, 2632(c)(5); Treas. Reg. § 26.2642-7

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202507005 Third Party Communication: None
Release Date: 2/14/2025 Date of Communication: Not Applicable
Index Number: 2642.00-00
Person To Contact:
--------------------------- ----------------------, ID No. -----------------
-------------------------- Telephone Number:
---------------------------- --------------------
-------------------------- Refer Reply To:
CC:PSI:B04
In Re: ---------------------------- PLR-109660-24
------------------------------------------------- Date:
November 15, 2024

Legend

Donor = ---------------------------
---------------------------
Spouse = -------------------------
---------------------------
Trust = ------------------------------------------------------------------------
-------------------------
Attorney = ----------------------
Date = -----------
Year = -------

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

This letter responds to your authorized representative's letter dated May 17, 2024, and
subsequent correspondence, requesting an extension of time under § 2642(g) of the
Internal Revenue Code and § 26.2642-7 of the Generation-Skipping Transfer (GST) Tax
Regulations to allocate GST exemption to transfers to a trust.

The facts and representations submitted are as follows:

Donor established an irrevocable trust (Trust) on Date in Year and made transfers to
Trust in Year. Trust provides that during Spouse's life, trustee may distribute income
and principal to Spouse and Donor's descendants to provide for their health, education,
maintenance, and support.

Spouse has a testamentary power of appointment over Trust in favor of Donor's
descendants and their spouses. To the extent that Spouse does not exercise such
power of appointment, Trust is divided into separate trusts for Donor's children and
descendants upon Spouse's death. With respect to a child's trust, the trustee may
make discretionary distributions to provide for that child's health, education,
maintenance, and support. In addition, each child's trust provides that the child has
incremental withdrawal rights over the trust principal culminating at age 45, but only
over the portion of the trust that is not exempt from GST tax. The child has no
withdrawal rights over the portion of the trust that is exempt from GST tax. The child
may appoint the remainder of the GST non-exempt portion of the trust at child's death
among Donor's descendants and the creditors of child's estate. The child may appoint
the remainder of the GST exempt portion of the trust at child's death only among
Donor's descendants (and not to the creditors of child's estate). If child does not
exercise the power of appointment, the remainder is to be held in further trust for child's
issue.

Donor engaged Attorney in connection with the formation of Trust and the preparation of
Donor's tax returns. Donor intended Trust to benefit grandchildren and more remote
descendants. However, Donor relied on Attorney to prepare the Form 709 for Year, and
Attorney did not advise Donor of the consequences of making an election under
§ 2632(c)(5) to opt out of automatic allocation of GST exemption. Accordingly, Donor
elected out of automatic allocation for transfers to Trust in Year, and GST exemption
was not allocated to Trust.

RULING REQUESTED

You have requested an extension of time to allocate GST exemption to the transfers
made to Trust in Year.

LAW AND ANALYSIS

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 2631(a) provides that, for purposes of determining the inclusion ratio, every
individual shall be allowed a GST exemption 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 an individual's GST exemption may be allocated 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 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 shall be
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.

Section 2632(c)(3)(A) provides that for purposes of this subsection, 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.

Section 2632(c)(5)(A)(i) provides that an individual may elect to have the automatic
allocation rules not apply to (I) an indirect skip, or (II) any or all transfers made by such
individual to a particular trust.

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 estate tax inclusion period, its value at the time of the close of the estate tax
inclusion period.

Section 2642(g)(1)(A) provides 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). Such regulations shall include procedures for requesting
comparable relief with respect to transfers made before the date of the enactment of
§ 2642(g).

Section 2642(g)(1)(B) provides that in determining whether to grant relief under this
paragraph, 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 under this paragraph, the time for making the allocation (or election) shall be
treated as if not expressly prescribed by statute.

Section 26.2642-7 of the Generation-Skipping Transfer Tax Regulations sets forth the
procedures for requesting an extension of time to make an allocation of GST exemption
described in § 2642(b)(1) or (2), and an election under § 2632(b)(3) or (c)(5), and the
standards used to determine whether relief may be granted.

Section 26.2642-7(d)(1) provides that requests for relief will be granted when and to the
extent that the transferor or the executor of the transferor's estate provides evidence
establishing to the satisfaction of the IRS that the transferor or the executor of the
transferor's estate acted reasonably and in good faith, and that the grant of relief will not
prejudice the interests of the government.

Section 26.2642-7(d)(2) provides a nonexclusive list of factors that will be considered in
determining whether the transferor or the executor of the transferor's estate acted
reasonably and in good faith for purposes of § 26.2642-7, including reasonable reliance
by the transferor or the executor of the transferor's estate on the advice of a qualified
tax professional.

Based on the facts submitted and the representations made, we conclude that the
requirements of § 26.2642-7 have been satisfied. Therefore, Donor is granted an
extension of time of 120 days from the date of this letter to allocate Donor's GST
exemption to the Year transfers to Trust.

The allocation of GST exemption should be made on an amended Form 709 for Year.
The Form 709 should be filed with the Internal Revenue Service at the following
address: Internal Revenue Service Center, ATTN: E&G, Stop 824G, 7940 Kentucky
Drive, Florence, KY 41042-2915.

In accordance with the Power of Attorney on file with this office, we have sent a copy of
this letter to your authorized representative.

Except as expressly provided herein, we neither express nor imply any opinion
concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. Specifically, we express no opinion as to whether Donor's
power to alter the child's withdrawal rights by changing the portion of the trust that is
exempt from GST tax (through a late allocation of GST exemption) would cause the
trust to be includible in the donor's estate under § 2036(a)(2) and § 2038. We further
express no opinion as to whether Donor's retained indirect power causes any portion of
Trust to be subject to an estate tax inclusion period under § 2642(f). We therefore
express no opinion as to the effect of an allocation of GST exemption made pursuant to
this grant of relief.

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.

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

                                               Sincerely,

                                               Associate Chief Counsel
                                               (Passthroughs and Special Industries)

                                     By:              /s/
                                               Daniel J. Gespass
                                               Senior Technician Reviewer, Branch 4
                                               Office of the Associate Chief Counsel
                                               (Passthroughs and Special Industries)

Enclosure
Copy for § 6110 purposes

cc: