On May 6, 2024, the Treasury Department published TD 9996, “Relief Provisions Respecting Timely Allocation of GST Exemption and Certain GST Elections.” These regulations address the circumstances and procedures under which an extension of time will be granted under Internal Revenue Code Section 2642(g) to make three allocations and elections for generation-skipping transfer (GST) tax purposes. The proposed version of these regs was issued 16 years ago on April 17, 2008. But even after so long, the new regs won’t be the final word on this topic. Additional forthcoming proposed regs will address the practical effect of a grant of relief and clarify the interplay between affirmative and automatic allocations. For relief to be granted, the transferor or the executor must have acted reasonably and in good faith.
The foundation for the new regs is based on IRC Section 2642(g)(1), enacted as Section 564 of the Economic Growth and Tax Relief Reconciliation Act, Public Law 107-16, Section 564, 115 Stat. 91 (2001). This section directed the Treasury to issue regulations prescribing the circumstances and procedures under which an extension of time would be granted to allocate GST exemption to a transfer, as described in IRC Section 2631.
The final regs took effect on May 6, 2024.
Three GST Elections Affected
The extension applies to an election:
(1) not to have the deemed (automatic) allocation of GST tax exemption apply to a direct skip. A direct skip is a transfer subject to gift or estate tax made to a person more than one generation below the transferor or a trust that’s considered a skip person. For example, it would apply to a gift by Marty to one of his grandchildren or a trust of which only his grandchildren are the current beneficiaries.
(2) not to have the deemed (automatic) allocation of GST tax exemption apply to an indirect skip or transfers made to a particular trust. An example of an indirect skip is a transfer, such as a gift, to a trust that includes non-skip persons (for example, a child) and skip persons (for example, the child’s descendants). This is the so-called election of opting out of the automatic GST tax allocation.
(3)) to treat any trust as a GST trust for purposes of IRC Section 2632(c). A “GST trust,” as described in Section 2632(c)(2)(B), is one to which GST tax exemption would be automatically allocated. Such an election, for example, would ensure that whenever gifts are made to that trust, GST tax exemptions are automatically allocated to protect transfers from the trust from GST tax.
Relief Through Private Letter Rulings
The new regs provide that taxpayers must apply for an IRS private letter ruling to get the extension. They should consider the cost of filing fees and professional fees for such a process. Filing fees for a PLR can be as high as $38,000 per Revenue Procedure 2023-1, and professional fees could be as much or more. Following these new regs, relief won’t be granted through Treasury Regulation Sections 301.9100-2(b) and 301.9100-3.
Prior Guidance Relevant
The following two revenue procedures remain relevant even after the new regs take effect for transferors within the scope of those revenue procedures.
Rev. Proc. 2004-46 provides a simplified alternate method to obtain an extension of time to allocate GST tax exemption to lifetime transfers to a trust if each of the following requirements is met: (1) The transfer qualified for the gift tax annual exclusion under IRC Section 2503(b); (2) the sum of the amount of the transfer and all other gifts by the transferor to the donee in the same year didn’t exceed the applicable annual exclusion amount for that year; (3) no GST tax exemption was allocated to the transfer; (4) the taxpayer has unused GST tax exemption to allocate to the transfer as of the filing of the request for relief; and (5) no taxable distributions or taxable terminations (which are transfers subject to GST tax) have occurred as of the filing of the request for relief.
Rev. Proc. 2004-47 provides alternative relief for taxpayers who failed to make a so-called “reverse” qualified terminable interest property election on an estate tax return. Failure would result in the spouse being treated as the transferor for GST tax purposes.
Circumstances and Intent
In determining whether to grant relief, the IRS must consider all relevant circumstances, including evidence of intent contained in the trust instrument or the instrument of transfer. Given the complexity of GST tax planning and the likely significant mistakes or oversights in making these complex elections, practitioners should consider making it very clear, perhaps by a statement of intent added to trust documents, whether or not the intent is for the trust to be GST tax exempt.
Also, practitioners should exercise care in completing and filing gift tax returns and reporting transfers to trusts to clearly state whether the intent is to make a particular trust or transfer GST tax exempt. To avoid ambiguity, especially for older trusts that may not have had allocations or elections made in years, practitioners might consider listing each client’s trusts on any filed gift tax return and stating the trust’s intended/believed GST tax status. Issues arise with gift tax returns when the preparer is a practitioner not particularly familiar with GST nuances, or the client, believing the gift tax return to be a “simple” matter, handles it on their own or with the family office or other internal personnel who don’t have the background to appreciate the nuances of GST tax matters.
Relevant Facts and Circumstances
The decision to grant the extension will vary for each situation, depending on the relevant facts and circumstances. The preamble to the new regs notes that “Given the inherent complexity of the GST exemption rules, no single factor can be determinative.” While Treas. Regs. Section 301.9100-3(b)(1) deems the reasonableness and good faith requirements to have been met if the taxpayer establishes any one of the factors therein, that rule is expressly made subject to the requirement of the absence of the use of hindsight and the other factors described in Treas. Regs. Section 301.9100-3(b)(3) and (c) and thus isn’t a one-factor test. Accordingly, proposed Treas. Regs. Section 26.2642-7(d)(2) delineated the many factors implicit in such a facts and circumstances inquiry, and the final regulations adopt the same methodology.
- No one factor will control.
- The taxpayer’s action before the IRS raises the GST tax issue isn’t deemed determinative.
- A delay in requesting relief after the need for relief is discovered may adversely affect the availability of relief.
- The taxpayer’s consistency in treating certain transfers as GST tax-exempt may support an extension to allocate the exemption. The lack of consistency won’t, however, prevent relief.
- Obtaining an economic advantage through hindsight is a negative factor. For example, it would be a negative factor if a taxpayer requests to allocate exemption to only one of two trusts (specifically, to the trust with the greater appreciation) if the two trusts were created on the same date with the same beneficiaries but with different assets.
- The expiration of the period of limitations and the use of valuation discounts aren’t factors considered when evaluating whether relief should be granted.
- The occurrence and effect of an intervening taxable termination or taxable distribution will be considered in determining whether the government’s interests would be prejudiced by granting relief. These events don’t bar a grant of relief but may be relevant in identifying the existence of hindsight or ascertaining the transferor’s intent.
Prior Affirmative Allocations
In the past, no extension was available to revoke an affirmative election under Section 2632(b)(3) or (c)(5) made on a timely filed federal gift or estate tax return to allocate GST tax exemption. The final regs change this, and now relief may be available provided that the requirements of Treas. Regs. Section 26.2642-7 are satisfied. The Treasury Department and the IRS will address the effect of a grant of relief on automatic allocations in future guidance to be issued under Section 2642(g).
Three narrow exceptions permit relief from affirmative allocations and elections.
- An allocation of GST tax exemption to a transfer or a trust (other than a charitable lead annuity trust or a trust subject to an estate tax inclusion period (ETIP) before the termination of the lead interest or ETIP, respectively is void to the extent that the amount allocated exceeds the amount necessary to obtain an inclusion ratio of zero.
- An allocation is void if the allocation is made with respect to a trust that, at the time of the allocation, has no GST tax potential with respect to the transferor making the allocation. For this purpose, a trust has GST potential even if the possibility of a GST is so remote as to be negligible.
- A late allocation is void if the late allocation was made in an effort to mitigate the tax consequences of the missed allocation that’s the subject of the grant of relief and that wasn’t eligible for relief prior to the enactment of Section 2642(g)(1).
Effect on Statute of Limitations
A request for relief doesn’t reopen, suspend or extend the period of limitations on assessment or collection of any estate, gift or GST tax under IRC Section 6501. So, the IRS may request that the transferor or the transferor’s executor consent under Section 6501(c)(4) to extend the period of limitations on assessment or collection of any or all gift and GST taxes.