GST Relief

Take-Away: The IRS just made it a bit easer to apply for an extension of time to make generation skipping transfer tax (GST) elections.

Background: Since 2001 the Tax Code contained provision to make generation skipping transfer tax (GST) elections, specifically about the application of the allocation of a transferor’s GST exemption. Proposed Regulations regarding timely GST elections did not appear until 2008. [IRC 2642(g)(1).] Under those Proposed Regulations a transferor was directed to file any request for extensions of time in which to make a GST exemption allocation election only by way of an expensive private letter ruling (PLR) request.  It took the IRS another 16 years before it finally issued Final Regulations pertaining to a request for an extension of time in which to make a late GST exemption allocation. [89 Federal Register 37166, May 6, 2024.]

Scope of GST Elections: An individual’s request of additional time in which to make a GST exemption allocation will pertain to:

• the allocation of GST tax exemptions to a taxable transfer;
• ‘opting out’ of the automatic allocation of GST tax exemption for a direct skip transfer;
• ‘opting out’ of the automatic allocation of GST tax exemption to a transfer made to a particular trust; and
• treat any trust as a ‘GST tax exempt’ trust.

Final Regulation Factors: The Final Regulations that now relate to extending time in which to make a GST exemption allocation thankfully no longer requires a request for a formal private letter ruling. Instead, a transferor must now show that he/she acted reasonably and in good faith in their request for an extension of time in which to make a GST election. A list of factors will now be considered by the IRS when it makes its decision to grant, or deny, a request for an extension of time to apply (or not) a GST exemption, none of which will be determinative along with the reality that any of the following factors can be weighed differently by the IRS. Those factors include:

• Consistency by the transferor in making allocations or elections;
• Prejudice to the interests of the Government;
• Whether an advantage was gained by waiting to make the election, i.e., hindsight motivates the election request;
• Timing of the relief requested;
• Intervening taxable events; and
• Timely allocations and elections.

Affidavits: In addition, the transferor must include detailed affidavits as part of his/her request. The affidavit will describe the events that led to the transferor’s failure to make the allocation, or the intended allocation, and the events that led to the discovery of the failure. No doubt, in some circumstances, affidavits from the transferor’s tax advisors will also be required.

Conclusion: Since the GST tax exemption is not portable to a surviving spouse and the GST tax rate is a flat 40% (in addition to the federal gift or estate tax), it is critically important that a transferor carefully use, and not waste, his/her $13.4 million GST exemption when making gifts. Hence the need to make use of the exemption to avoid future GST taxes on taxable distributions and taxable terminations when a trust is funded. The Final Regulations are helpful, but only up to a point since the IRS continues to have the flexibility to pick and choose which factors to weigh in granting an extension of time in which to make the GST election.