GST exemption allocation.

The IRS issued final regulations (TD 9208) clarifying how taxpayers may (1) avoid application of the automatic generation-skipping transfer (GST) tax exemption allocation rules applicable to transfers to a GST trust and (2) terminate such an election. The regulations also address how taxpayers may elect GST treatment for a trust.

Comments considered: The Service said it accepted a number of recommendations made in comments on the proposed regulations (REG-153841-02). The proposed regulations had permitted only two options for electing out of the automatic allocation rules--transferors could elect out as to a current transfer only, or as to a current-year transfer and all future transfers to the same trust.

Commentators asked for more options; in response, the Service said the final rules add the option of electing out for only certain designated future transfers to a trust, or all future transfers made by the transferor to any trust, regardless of whether the trust exists at the time of the election.

The IRS also noted that, under the final regulations, the transferor may elect out on future transfers even if no current-year transfer is made and the transferor is not otherwise required to file a Federal gift tax return.

Further, the final regulations have been clarified to confirm that an election out of the automatic allocation rules for future years is limited to allocations to indirect skips made during the transferor's life and has no effect on the allocation rules that apply after the transferor's death.

The Service also clarified that the automatic allocation to an indirect skip is effective as of the date of the transfer, and becomes irrevocable on the due date for filing Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, regardless of whether a return is filed to report the transfer. A late-filed gift tax return will not change the allocation.

The IRS also accepted a recommendation that an affirmative partial allocation of GST exemption be treated as an election out of the automatic allocation rules for the balance of that specific transfer.

The final regulations on automatic allocation to an indirect skip subject to an estate tax inclusion period (ETIP) have been revised to match rules for a direct skip, so that the allocation to a direct or an indirect skip is deemed to be made at the ETIP's close.

Thus, a transferor may elect out of the automatic allocation rules for transfers subject to an ETIP at any time before the due date of the Federal gift tax return for the calendar year in which the ETIP closes. Transferors may elect out of the allocation rules on the gift tax return reporting the transfer to the trust or on a gift tax return filed for any calendar year after the year of the transfer, up to and including the calendar year in which the ETIP closes.

An election out of the automatic allocation for all current transfers or for all transfers in the current year includes an election out for a transfer subject to an ETIP that was made during that year, but an election out of the automatic allocation rules for all future transfers to a trust will not apply to any previous transfers to a trust subject to an ETIP that is to close in the future.