Late election to treat trust as a GST trust allowed

Plain-English summary

A taxpayer created a trust for a son and the son's descendants and intended to allocate generation-skipping transfer tax exemption to every contribution. Because the trust was not automatically treated as a GST trust for the relevant year, a tax professional needed to make an election but failed to do so on Form 709. The error was later discovered by counsel. The IRS found that the taxpayer reasonably relied on a qualified professional and satisfied the regulatory relief standards. It granted 120 days to elect on an amended Form 709 that the trust be treated as a GST trust effective on the transfer date.

Ruling snapshot

• Question: May the taxpayer make a late election to treat the trust as a GST trust for automatic exemption-allocation purposes?
• Outcome: Approved, with 120 days to file an amended Form 709
• Key authorities: IRC §§ 2632(c) and 2642(g)(1); Treas. Reg. § 26.2642-7

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 202520007
Third Party Communication: None
Release Date: 5/16/2025
Date of Communication: Not Applicable
Index Number: 2632.00-00, 2642.07-00
Person To Contact:
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Refer Reply To:
CC:PT&E:B04
PLR-114863-24
In Re: ---------------------------------------- Date:
February 18, 2025

LEGEND

Taxpayer = -------------------------------------------------
Son = -------------------
Trust = ------------------------------------------------------------------
Accounting Firm = ------------------
----------------------------------
Law Firm = -----------------------------------------
Date 1 = ---------------------------
Date 2 = --------------------------
Year 1 = -------
Year 2 = -------

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

This letter responds to your authorized representative’s letter dated August 20, 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 summarized as follows:

Taxpayer created and funded Trust on Date 1. Taxpayer transferred additional property to Trust on Date 2 in Year 1.

Son is the beneficiary of Trust during Son’s lifetime. Son has an unlimited right to withdraw each contribution of property to Trust. Each year, Son’s right to withdraw Trust property lapses to the extent of the greater of $5,000 or 5 percent of the aggregate value of the trust estate available for withdrawal.

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Upon Son’s death, Trust is distributed pursuant to the exercise of Son’s limited power of appointment. If Son does not exercise his limited power of appointment, the entire unappointed portion of Trust is distributed to Son’s issue, per stirpes. Trust has GST potential. Trust was not a GST trust within the meaning of § 2632(c)(3)(B) in Year 1.

Taxpayer hired a qualified tax professional from Accounting Firm for tax advice and to prepare her Form 709, United States Gift (and Generation Skipping Transfer) Tax Return, for Year 1. Taxpayer intended that GST exemption would be allocated to all transfers to Trust, including the Date 2 transfer. However, the qualified tax professional failed to allocate GST exemption to the Date 2 transfer to Trust on the Form 709 for Year 1 that the qualified tax professional prepared for Taxpayer. Accordingly, no GST exemption was allocated to the Date 2 transfer to Trust. In Year 2, attorneys from Law Firm discovered the failure to allocate Taxpayer’s GST exemption to the Date 2 transfer.

You have requested an extension of time under § 2642(g) and § 26.2642-7 to elect to treat Trust as a GST trust within the meaning of § 2632(c)(3)(B) as of Date 2.

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.

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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)(3)(B) provides, in relevant part, that the term “GST trust” means a trust that could have a GST with respect to the transferor unless an exception listed in § 2632(c)(3)(B)(i)-(vi) applies.

Section 2632(c)(5)(A)(i) provides, in relevant part, 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 2632(c)(5)(B)(ii) provides, in relevant part, that the 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 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).

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.

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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. Accordingly, Taxpayer is granted an extension of time of 120 days from the date of this letter to elect to treat Trust as a GST trust within the meaning § 2632(c)(3)(B). The election will be effective as of Date 2. The election should be made on an amended Form 709 for Year 1. 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. You should attach a copy of this letter to the amended Form 709.

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

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.

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, Trusts, and Estates

/s/
_______
Leslie H. Finlow
Senior Technician Reviewer, Branch 4
Office of the Associate Chief Counsel
(Passthroughs, Trusts, and Estates)

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Enclosure:
Copy for § 6110 purposes

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