Private Letter Ruling

Transcription

1 93 ALI-ABA Video Law Review Advanced Estate Planning Practice Update Winter 2006 February 9, 2006 Live via Satellite TV/Webcast on the American Law Network Private Letter Ruling By Lloyd Leva Plaine Sutherland Asbill & Brennan LLP Washington, D.C Lloyd Leva Plaine

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3 95 By Lloyd Leva Plaine Sutherland Asbill & Brennan LLP, Washington, D.C. January 13, 2006 PLR (September 14, 2005) In PLR , the Internal Revenue Service ( IRS ) granted an extension of time under section 2642(g) of the Internal Revenue Code (the Code ) and sections and of the Procedure and Administration Regulations to make allocations of the taxpayer s GST exemption to a trust. The taxpayer created the trust for the benefit of Wife, Son, Daughter, and the descendants of Son and Daughter. During the taxpayer s life, Son, Daughter, and their respective descendants were the beneficiaries of the trust. After the death of the taxpayer, Wife, Son, and the descendants of Son and Daughter were the beneficiaries. (It appears that Daughter was inadvertently omitted as a beneficiary in the statement of the facts at issue in the ruling.) The trustees of the trust could make discretionary distributions of income and principal to the beneficiaries. The taxpayer contributed $X to the trust on Date 2 of Year 1. The ruling states that [a]s a result of advice from a tax professional, [the taxpayer s and Wife s Forms 709 for Year 1] reflected that a gift of one-half of the interest of Son, Daughter, and the descendants of Son and Daughter in Trust during [the taxpayer s] lifetime was made by [Wife] pursuant to [Code] Furthermore, no allocation of GST exemption was made on the Forms 709, because the tax professional failed to allocate or advise Taxpayer and Wife to allocate their GST exemptions to the gift to the trust. On Date 3 of Year 2, Taxpayer contributed $Y to the trust. The tax professional did not allocate or advise the taxpayer to allocate his GST exemption to the gift, so no allocation was made on the Form 709 filed for Year 2. Shortly before the taxpayer s death, the failure to allocate his GST exemption to the contributions to the trust was discovered. A portion of the taxpayer s GST exemption was automatically allocated to the trust as a result of the taxpayer s death. The taxpayer s estate and Wife requested that the IRS rule that the taxpayer was the transferor of the Year 1 gift for GST tax purposes. The taxpayer s estate also requested that the IRS grant the estate an extension of time to allocate the taxpayer s GST exemption to the Year 1 and Year 2 transfers, that the allocation would be effective as of the dates of the transfers, and that as a result of the allocations, the trust would have an inclusion ratio of zero. According to the ruling, under section (b)(4) of the Treasury Regulations, if one spouse transferred property in part to his or her spouse and in part to third parties, split gift treatment is effective with respect to the interest transferred to third parties only insofar as the interest transferred to third parties is ascertainable at the time of the gift and severable from the interest transferred to the spouse. Citing Rev. Rul , C.B. 605, and Wang v. Comm r, T.C. Memo , the IRS ruled that because the trust provided that during the taxpayer s lifetime, the trustee had the discretion to distribute income and principal to the trust beneficiaries, this lifetime interest is not susceptible of determination and, hence, severable WO

4 96 from the distributions to occur at [the taxpayer s] death. Therefore, the interest transferred to third parties was not ascertainable at the time of the gift and severable from the interest transferred to Wife. The IRS concluded that [Wife] cannot treat the lifetime interest of Son, Daughter, and their respective descendants... as being made one-half by her and one-half by [the taxpayer] pursuant to Thus, the IRS ruled that the taxpayer was the transferor of the Year 1 gift to the trust for GST tax purposes. Because the taxpayer had employed a qualified tax professional and the tax professional did not make or advise the taxpayer to make the allocation of his GST exemption, the IRS found that the taxpayer had acted reasonably and in good faith. Accordingly, the IRS ruled that the requirements of section of the regulations had been met and granted the estate an extension of time to allocate the taxpayer s GST exemption to the Year 1 and Year 2 gifts. The allocations would be effective as of the dates of the gifts and based on the value of the assets contributed to the trust on the dates of the gifts. The IRS also ruled that the trust would have an inclusion ratio of zero, provided the amount of GST exemption allocated to Trust is equal to the federal gift tax value of the assets contributed. Because Trust will have a zero inclusion ratio at [the taxpayer s] death, there will be no 2632(e) automatic allocation to Trust. This ruling is of interest because it clarifies to a certain extent the application of Code section 2652(a)(2) and Treasury Regulations section (a)(4). Section 2652(a)(2) of the Code provides: If, under section 2513, one-half of a gift is treated as made by an individual and one-half of such gift is treated as made by the spouse of such individual, such gift shall be so treated for purposes of this chapter. Treasury Regulations section (a)(4) provides: In the case of a transfer with respect to which the donor s spouse makes an election under section 2513 to treat the gift as made one-half by the spouse, the electing spouse is treated as the transferor of one-half of the entire value of the property transferred by the donor, regardless of the interest the electing spouse is actually deemed to have transferred under section The donor is treated as the transferor of one-half of the value of the entire property. See (c)(5) Example 3, regarding allocation of GST exemption with respect to split-gift transfers subject to an ETIP. Thus, the spouses have to be able to gift-split under Code section 2513 in order for the rule of Treasury Regulations section (a)(4) to apply. Therefore, in the case of a purely discretionary trust of which the spouse is a beneficiary, the donor is the transferor for GST tax purposes with respect to all of the property put in the trust. Example 3 of section (c)(5) of the Treasury Regulations illustrates the application of the regulation with respect to an ETIP trust. Even if a gift has a low value for gift tax purposes for example, 10% of the entire value of the property transferred by the donor if the gift is allowed to be split under Code section 2513, each spouse is treated as the transferor of one-half of the entire value of the entire property transferred by the donor for GST tax purposes. WO

5 97 If part of a trust were eligible for gift-splitting because the interest of the beneficiaries other than the spouse was ascertainable and severable from the spouse s interest, although it is not answered by this ruling, it appears that if the spouses gift-split, each of the spouses would be treated for GST tax purposes as the transferor of one-half of the entire property not just onehalf of that portion of the property of which the spouse was not a beneficiary. WO

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