In Private Letter Ruling 202210010 (Dec. 13, 2021) the donor established an irrevocable trust for the benefit of his descendants. It was a classic generation-skipping transfer (GST) trust that could benefit skip persons:
(1) distributions can be made to any of the donor’s descendants; (2) after the donor’s death, the trust splits into shares for each child and their respective descendants; and (3) on a child’s death, they have a limited power of appointment (POA) and a contingent general POA over only that portion of the trust that would be necessary to minimize estate and GST tax. A trust that grants withdrawal rights or general POAs over at least 25% of the trust to non-skip persons doesn’t qualify as a GST trust under the Internal Revenue Code, but that wasn’t the case here (and the formula contingent general POA didn’t cause the trust to fall into the exception).
The automatic GST allocation rules would usually apply to a GST trust, unless the donor opted out on a gift tax return. IRC Section 2632(c)(1) provides that an individual’s unused GST tax exclusion is automatically allocated to indirect skip transfers that the individual makes during their lifetime. An individual may elect out of the automatic GST tax exemption allocation to indirect skips made to a trust by attaching an election out statement to a timely filed gift tax return.
The donor filed a gift tax return, and there was no election out. However, errors were made: The gift was reported on Part 1 of Schedule A, as a transfer subject only to gift tax, and it didn’t indicate any automatic allocation on Schedule D.
The IRS ruled that GST tax exemption was automatically allocated to the transfers to the trust despite the donor incorrectly reporting gifts as “Gifts Subject only to Gift Tax” rather than “Indirect Skips.” The IRS reasoned that incorrectly labeling the transfers didn’t constitute filing of an election out statement required to elect out of the automatic allocation rules applied to indirect skip transfers.