How to fix an incorrect GST exemption allocation.

• Author: Larson, Barbara E.
• Position: Generation-skipping transfer tax

In a series of recent private letter rulings, the IRS addressed the circumstances under which taxpayers or their personal representatives may obtain relief to file late elections in or out of the allocation of the generation-skipping transfer (GST) tax exemption in regard to transfers to GST trusts. A GST trust is defined under Sec. 2632(c)(3)(B) as a trust that could have a GST with respect to the transferor unless certain provisions within the trust instrument disqualify it as a GST trust. In all the letter rulings reviewed in this item, the IRS granted relief to make late elections pursuant to Sec. 2642(g) and Regs. Sec. 301.9100-3. The ability to obtain relief ensures that an individual's GST exemption can be allocated correctly to certain transfers in trust. If relief is not granted, incorrect allocations are generally irrevocable.

The method for allocating the GST exemption to a GST trust can differ depending on the date the trust was created. If a trust was created on or before Dec. 31,2000, an individual would need to directly allocate the GST exemption on a timely filed Form 709, United States Gift Tax (and Generation-Skipping Transfer Tax) Return. However, a GST trust created after Dec. 31,2000, falls under the automatic allocation rules of Sec. 2632, unless the individual affirmatively elects out of the automatic allocation. To make the election, the individual must timely file a Form 709 for the calendar year in which the transfer(s) occurred and attach a written election statement to the form (Sec. 2632(c)(5)). In general, the statement must identify the trust and specifically provide that the individual is electing out of the automatic allocation of GST exemption with respect to the described transfer(s) (Regs. Sec. 26.2632-1(b)(2)(iii)(B)).

Letter Rulings 201635005 and 201638020 involve requests for an extension of time to make a late election out of the automatic allocation rules under Sec. 2632(c)(5). In Letter Ruling 201635005, the taxpayer retained a tax professional to prepare a Form 709 to report a transfer to an irrevocable trust created after Dec. 31,2000. The tax professional timely filed the form and elected out of the automatic allocation of GST exemption for this initial transfer. In preparing the following year's Form 709 to report two additional transfers to the trust, the tax professional inadvertently failed to elect out of the automatic allocation of GST exemption for these subsequent transfers.

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