IRS Agrees to Void Allocations of GST Tax Exemption to GiftsIRS Agrees to Void Allocations of GST Tax Exemption to Gifts

Each year for four years, a taxpayer and his spouse made outright gifts to their two grandchildren.  The child of the taxpayer and his spouse, who was the parent of the two grandchildren, had died before any such gifts were made.  For each year that a gift was made, the taxpayer and his spouse filed timely gift tax returns reporting the gifts and electing to split the gifts under Internal Revenue Code Section 2513.   In addition, the taxpayer and his spouse allocated generation-skipping transfer (GST) tax exemption to the reported gifts each year.  The taxpayer subsequently died.  The personal representative of the taxpayer’s estate requested a ruling from the Internal Revenue Service that the allocations of GST tax exemption to the gifts made during each of the four years were void because there was no GST potential with respect to those transfers. 

Predeceased Ancestor Exception Applies

In PLR 201536012 (released Sept. 4, 2015), the IRS ruled that the taxpayer’s grandchildren weren’t skip persons with respect to the taxpayer and his spouse at the time of the transfers, since the parent of such grandchildren who was a lineal descendant of the taxpayer and his spouse was dead at the time of the transfer.  Thus, under IRC Section 2651(e)(1) (that is, the predeceased ancestor exception), the transfer from the taxpayer and his spouse to their grandchildren wasn’t a direct skip, and there was no potential at the time of the gifts for any GST. 

No GST Potential

Pursuant to Treasury Regulations Section 26.2632-1(b)(4)(i), an allocation of GST exemption is void if the allocation is made with respect to a trust that has no GST potential with respect to the transferor making the allocation at the time of the allocation.  Although the regulations address only transfers to trusts, the IRS extended the rationale of this regulation and held that an allocation of GST tax exemption is void if the allocation is made with respect to an outright transfer that’s not a direct skip.  Thus, the allocations of GST tax exemption made on the gift tax returns for the taxpayer and his spouse for each of the four years were void.