On May 6, 2024, the Treasury Department published TD 9996, “Relief Provisions Respecting the Timely Allocation of the 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 transfer tax (GST) purposes. The proposed version of these registries was released 16 years ago on April 17, 2008. But even after all this time, the new regimes will not be the final word on the subject. Additional future proposed rules 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 executor must have acted reasonably and in good faith.
The basis for the new rules 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 describing the circumstances and procedures under which an extension of time would be granted to designate the GST exemption for a transfer, as described in IRC section 2631.
The final rules took effect on May 6, 2024.
Three GST Elections are affected
The extension applies to elections:
(1) the presumptive (automatic) allocation of the GST tax exemption for a direct skip does not apply. A direct pass-through is a transfer subject to gift or estate tax that is made to a person more than one generation below the transferor or to a trust that is considered a pass-through person. For example, it would apply to a gift from Marty to one of his grandchildren or to a trust of which only his grandchildren are the actual beneficiaries.
(2) not to apply the deemed (automatic) allocation of the GST tax exemption to an indirect skip or transfers made to a specified trust. An example of an indirect skip is a transfer, such as a gift, to a trust that includes non-skippers (for example, a child) and skippers (for example, the child's descendants). This is the so-called opt-out of automatic GST tax allotment.
(3)) to treat each 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 the GST tax exemption will automatically be allocated. Such an election would, for example, ensure that whenever gifts are made to that trust, GST tax exemptions are automatically allocated to shield transfers from the trust from GST tax.
Relief through private letter rulings
The new rules provide that taxpayers must apply for an IRS private letter ruling to receive the extension. They must consider the cost of filing fees and professional fees for such a process. Filing fees for a PLR can be up to $38,000 for Revenue Procedure 2023-1, and professional fees can be that much or more. Following these new rules, relief will no longer be provided through Treasury Regulation Sections 301.9100-2(b) and 301.9100-3.
Relevant preliminary instructions
The following two revenue procedures remain relevant even after the new rules come into effect for transferors within the scope of these revenue procedures.
Rev. Proc. 2004-46 provides an alternative simplified method to obtain an extension of time for the distribution of the GST tax exemption for lifetime transfers to a trust if each of the following requirements is met: (1) The transfer qualifies for the annual gift tax exemption under IRC Section 2503(b); (2) the sum of the amount of the transfer and all other gifts from the transferor to the grantor in the same year did not exceed the applicable annual exclusion amount for that year; (3) no GST exemption was assigned to the transfer; (4) the taxpayer has unused exemption from GST tax to share in the transfer since the filing of the request for relief; and (5) no taxable distributions or taxable terminations (which are transfers subject to GST tax) have occurred since the filing of the claim for relief.
Rev. Proc. 2004-47 provides alternative relief to taxpayers who failed to make a so-called “reverse” qualified property interest termination election on an estate tax return. Failure to do so would result in the spouse being treated as the transferor for GST tax purposes.
Circumstances and purpose
In determining whether to grant relief, the IRS must consider all relevant circumstances, including evidence of intent contained in the trust instrument or transfer instrument. Given the complexity of GST tax planning and the potential for significant errors or oversights in making these complex choices, practitioners should consider making it very clear, perhaps with a statement of intent added to the trust documents, regardless of whether the point is whether the belief is or not. Exemption from GST taxes.
Also, practitioners should exercise care in completing and filing gift tax returns and reporting transfers to trusts to clearly state whether the intention is to make a particular trust or transfer exempt from GST. To avoid ambiguity, particularly for legacy trusts that may not have made distributions or elections in years, practitioners may consider listing each client's trusts on any gift tax return filed and declaring the intended/trust tax status of GST trust. Issues arise with gift tax returns when the preparer is a practitioner not particularly familiar with the nuances of GST, or the client, believing that the gift tax return is a “simple” matter, handles it himself or with the tax office. family or other internal personnel who do not have the background to appreciate the nuances of GST tax issues.
Relevant facts and circumstances
The decision to grant an extension will vary from case to case, depending on the relevant facts and circumstances. The preamble to the new rules notes that “Given the inherent complexity of the GST exemption rules, no single factor can be determinative.” While Treas. The rules. Section 301.9100-3(b)(1) deems that the requirements of reasonableness and good faith are satisfied if the taxpayer determines any of the factors therein, that rule is expressly subject to the requirement of lack of use of the forward-looking statement and the other factors described in Treas. The rules. Section 301.9100-3(b)(3) and (c) and thus is not a one-factor test. Accordingly, the proposed Treas. The rules. Section 26.2642-7(d)(2) outlined many factors implicit in such a fact and circumstances inquiry, and the final regulations adopt the same methodology.
- No one factor will control.
- Action by the taxpayer before the IRS raises the GST tax issue is not considered determinative.
- A delay in requesting assistance after the need for relief is discovered may adversely affect the availability of assistance.
- Taxpayer consistency in treating certain transfers as exempt from GST may support an extension to the distribution of the exemption. However, lack of consistency will not prevent relief.
- Taking an economic advantage through hindsight is a negative factor. For example, it would be a negative factor if a taxpayer seeks to allocate the exemption to only one of two trusts (specifically, the trust with the larger rating) if both trusts were created on the same date with the same beneficiaries, but with different assets.
- The expiration of the limitations period and the use of valuation allowances are not taken into account when assessing whether relief should be granted.
- The occurrence and effect of an intermediary taxable severance or distribution will be considered in determining whether the government's interests would be prejudiced by granting relief. These events do not preclude relief, but may be important in identifying the existence of an afterthought or in ascertaining the intent of the transferor.
Previous affirmative allocations
In the past, there was no extension to revoke an affirmative election under section 2632(b)(3) or (c)(5) made on a timely filed federal or estate tax return to allocate the exemption from GST taxes. The final rules change this, and relief may now be available provided that the requirements of Trea. The rules. 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 allow relief from affirmative allocations and elections.
- An allocation of GST exemption to a transfer or a trust (other than a charitable superannuation trust or a trust subject to an estate tax inclusion period (ETIP) before the end of the principal interest or ETIP is invalid to the extent that the amount allocated exceeds the amount needed to obtain a zero inclusion ratio.
- A distribution is void if the distribution is made in respect of a trust that, at the time of the distribution, has no GST tax potential in relation to the transferor making the distribution. For this purpose, a trust has GST potential even if the possibility of a GST is so remote as to be negligible.
- A delayed distribution is void if the delayed distribution was made in an effort to mitigate the tax consequences of the lost distribution that is subject to the grant of relief and that was not eligible for relief prior to the enactment of section 2642(g). (1).
Effect on Statute of Limitations
A request for relief does not reopen, suspend, or extend the period of limitations on the assessment or collection of any estate, gift, or GST tax under IRC Section 6501. So, the IRS may require that the transferor or the transferor's executor approve under Section 6501(c) (4) to extend the period of limitations on the assessment or collection of any or all gift taxes and GST.