Recent developments in estate planning.

• Author: Ransome, Justin
• Position: Part 2

This is the second part of a two-part article examining developments in estate, gift, and generation-skipping transfer (GST) tax and fiduciary income tax between June 2017 and May 2018. Part 1, in the October issue, discussed legislative, gift, and estate tax developments. Part 2 discusses GST tax and trust tax developments as well as inflation adjustments for 2018.

GST tax

Finality of gift tax returns

A pair of private letter rulings continue a recent trend of rulings regarding the finality of gift tax returns pursuant to Sec. 2504 and the Treasury regulations thereunder. The rulings note the distinction between the finality of gift-splitting elections and how the rules governing allocation of GST exemption work regardless of how the former are reported on a gift tax return.

Letter Ruling 201724007: In Letter Ruling 201724007, the IRS ruled that even though split-gift treatment by taxpayers was incorrectly elected on their timely filed gift tax returns, Sec. 2504(c) prevented the IRS from determining whether the election was effective because the time for such a determination had expired and the split-gift treatment was irrevocable. Further, the IRS determined that since the election to split gifts was determined to be irrevocable, GST exemption would be automatically allocated to each one-half transfer reported on the taxpayers' respective gift tax returns.

The wife created a trust for the benefit of her husband and their descendants. Under the terms of the trust and during the husband's life, the trustee of the trust had discretion to distribute income and principal to the husband for his comfort, welfare, and best interests. If the wife predeceased the husband, the trustee had discretion to distribute income and principal to the husband and their descendants for their comfort, welfare, and best interests. Upon the death of the husband, the remaining principal was to be divided and held in separate trusts for the benefit of the wife's surviving children and the issue of her deceased children.

In the same year, the husband transferred property to three adult children. The husband and the wife each timely filed a gift tax return electing to split the gifts they made to the trust and the children. On the wife's Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, the property transferred to the trust was mistakenly reported on Schedule A, "Computation of Taxable Gifts," Part 1, "Gifts Subject Only to Gift Tax." The wife did not report any allocation of her GST exemption to the transfer to the trust on Schedule D, "Computation of Generation-Skipping Transfer Tax," Part 2 (pertaining to the allocation of GST exemption). Additionally, the wife did not attach a statement electing out of the automatic allocation of GST exemption to her gift tax return. The husband's Form 709 was similarly filed. The couple later amended their gift tax returns to correctly report the transfer to the trust on Schedule A, Part 3, "Indirect Skips," and on Schedule D, Part 2, line 5, to indicate that their respective GST exemptions were automatically allocated to the transfers to the trust.

The taxpayers requested two rulings pertaining to the gift tax returns they originally filed: (1) that the period for assessment of gift tax under Sec. 6501 had expired and that the gift-splitting election on the returns was final and applied to all gifts made by both taxpayers, as reported; and (2) that the automatic allocation rules of Sec. 2632(c) applied to the transfers made to the trust and that the exemption amount allocated to such transfers was equal to the amount each spouse was deemed to have transferred on the couple's gift tax returns.

For the first requested ruling, the IRS considered the applicability of Sec. 2513 to gifts made by a spouse. Generally, Sec. 2513 allows a spouse to elect to treat a gift made by one spouse as made one-half by each spouse, as long as the gift is to a third party. Further, the IRS noted that Rev. Rul. 56-439 disallows gift splitting on transfers to trusts if the donor's spouse is a potential beneficiary of the trust. Despite this analysis, the IRS ruled that because the time had passed to determine whether the election to split gifts under Sec. 2504(c) was effective, the election was irrevocable with respect to the transfer to the trust.

For the second requested ruling, the IRS ruled that since the trust qualified as a GST trust under Sec. 2632(c), the taxpayers' GST exemption would be automatically allocated to transfers to the trust. The IRS also noted that the couple each filed a timely gift tax return to treat the initial transfers to the trust as split gifts and that the taxpayers later filed amended Forms 709 to show the automatic allocation of their GST exemption to the transfers. Therefore, since the IRS had ruled that the split-gift treatment was irrevocable, each spouse was treated as the transferor of one-half of the transfers to the trust, and the automatic allocation rules applied to allocate each spouse's GST exemption to one-half of the transfers.

Letter Ruling 201811003: In Letter Ruling 201811003, the IRS ruled: (1) even though a husband's and wife's gift tax returns erroneously reported that a split gift was made 75% by the husband and 25% by the wife, the amount of the taxable gift could not be adjusted because the statute of limitation for assessment of gift tax had expired; and (2) the executor of the wife's estate could make a late allocation of GST exemption to prior years' transfers.

The husband created four irrevocable trusts--one for each of his children. The couple agreed to split the gifts to the trusts. However, their accounting firm erroneously treated the gifts as having been made 75% by the husband and 25% by the wife (instead of 50/50, as mandated by Sec. 2513). Although the trusts had GST tax potential, neither the couple's attorney nor their accountant advised them about the allocation of GST exemption.

Several years later, the couple made additional gifts (not to the trusts). The accounting firm, realizing that no GST exemption had been allocated to the transfers to trust, advised the husband, but not the wife, to make a late allocation of GST exemption. The husband's late allocation of GST exemption erroneously allocated an amount equal to 100% of the value of the year 1 transfers.

The executor of the wife's estate requested a ruling that because the period for assessment of gift tax had ended, the wife be treated as the transferor of the 25% of the gifts to the trusts that were reported on her return. The IRS ruled that the statute of limitation for assessment of the gift had run, and, even though the gift had been erroneously split 75% to the husband and 25% to the wife, the amount of the gift could not be adjusted.

Additionally, the executor of the wife's estate requested permission to make a late allocation of GST exemption to the wife's portion of the year 1 gifts. The IRS granted permission to make the late...