As I have discussed in a prior blog, the generation skipping transfer tax (“GSTT”) is a harsh tax and can total as much as 80%, when combined with the estate tax. Fortunately, each US individual is entitled to an exemption of $11.2 million in 2018. For our wealthy clients care must be made how and when to allocate the GSTT exemption. A recent private letter ruling (“PLR”) illustrates the relief that clients and practitioners can receive from the Internal Revenue Service (“IRS”) if a practitioner or client misses the proper allocation.
In PLR 201801001, the son of the decedent is named as personal representative. The decedent’s assets are to be ultimately distributed to a trust for the benefit of the decedent’s spouse and issue. The income is to be paid to the spouse and she holds a limited power to appoint the principal to Decedent’ issue. In default of the exercise of the power of appointment, the property is distributed to decedent’s children and issue.
Son’s attorney prepared the federal estate tax return, Form 706 United States Estate (and Generation-Skipping Transfer) Tax Return. However, none of the decedent’s GSTT exemption was allocated to the trust. The error was later discovered by another attorney.
The personal representative, in a PLR, requested an extension of time to allocate the GSTT exemption to the trust. If GSTT exemption is not allocated to such a trust, future distributions to the decedent’s grandchildren would be subject to GSTT.
Under Section 2642(g) of the Internal Revenue Code (the “Code”), the IRS can, by regulation, provide the circumstance and procedure under which an extension of time will be granted to make an allocation of GSTT exemption. The IRS must take into account all relevant circumstances including evidence of intent contained in the trust instrument
Further, in IRS Notice 2001-50, the IRS noted that, as the time for allocation of the GSTT exemption is not set forth specifically by statute, a taxpayer may seek an extension of time under Treasury regulation 301.9100-3. Such regulation provides that such relief will be granted when the taxpayer provides the evidence to establish that the taxpayer acted reasonably and in good faith and granting such relief will not prejudice the interests of the government.
A taxpayer is deemed to have acted reasonably and in good faith if the taxpayer reasonably relied on a qualified tax professional and the tax professional failed to make or advise the taxpayer to make the election.
The IRS granted the relief. Interestingly the IRS instructed the taxpayer to make the election not on an “amended” Form 706 but on a supplemental Form 709 and file same with the Cincinnati Service Center within 120 days of the issuance of the PLR.
ADVICE: A great result for the taxpayer (and his attorney) but this author wonders why this PLR had to be completed. As Congress realized that the GSTT is so complicated and many taxpayers make mistakes in this area, Section 2632 of the Code was enacted to provide for an automatic allocation if one does not affirmatively make an allocation of the GSTT exemption to a GSTT trust. However, in determining which trust is a GSTT trust for the automatic allocation is very difficult to determine under this statute. Thus, most practitioners affirmatively make such allocation so the trust is clearly exempt from GSTT. Perhaps this practitioner wanted to make absolutely sure that the GSTT exemption was allocated because the GSTT is harsh.
WORD OF THE WEEK: A power of appointment (“POA”) is a right given to an individual (the “donee”) to designate the new owner of property.
If the power is unrestricted and the donee can appoint to ANYONE, including the donee, the donee’s estate or the creditors of the donee or the creditors of the donee’s estate (the “Unlimited Appointees”), then such power is called a general power of appointment (“GPOA”). A GPOA can create an estate or gift tax consequence occurs under Sections 2514 and 2041 of the Code. The estate or gift tax result may or may not be the result you desire.
Alternatively, if a donee only has the right to appoint to individuals or charities OTHER than the Unlimited Appointees, then the power is a limited power of appointment (“LPOA”). Gift and estate tax consequences generally do not result from the exercise of a LPOA.
The distinction between these two powers is critical in estate planning and drafting. With the increase in the applicable exclusion amount (now 11.2 million), the GPOA may be desirable to include assets in the estate for a step up in basis.
GENEROSITY IS A KEY TO HAPPINESS …REACH OUT AND HELP SOMEONE TODAY! 😎