Election Out of GST Deemed Allocations, 37258-37263 [05-12759]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 70, Number 124 (Wednesday, June 29, 2005)]
[Rules and Regulations]
[Pages 37258-37263]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-12759]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 26 and 602

[TD 9208]
RIN 1545-BB54


Election Out of GST Deemed Allocations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation.

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SUMMARY: This document contains final regulations providing guidance 
for making the election under section 2632(c)(5)(A)(i) of the Internal 
Revenue Code to not have the deemed allocation of unused generation-
skipping transfer (GST) tax exemption under section 2632(c)(1) apply 
with regard to certain transfers to a GST trust, as defined in section 
2632(c)(3)(B). The final regulations also provide guidance for making 
the election under section 2632(c)(5)(A)(ii) to treat a trust as a GST 
trust. The regulations primarily affect individuals.

DATES: Effective Date: The regulations are effective June 29, 2005.
    Applicability Date: For dates of applicability, see Sec.  26.2632-
1(e).

FOR FURTHER INFORMATION CONTACT: Mayer R. Samuels, (202) 622-3090 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under control number 1545-1892.
    The collection of information in these final regulations is in 
Sec.  26.2632-1(b)(2)(iii) and (b)(3). This information is required by 
the IRS for taxpayers who elect to have the automatic allocation rules 
not apply to the current transfer and/or to future transfers to the 
trust or to terminate such election. This information is also required 
by the IRS for taxpayers who elect to treat trusts described in section 
2632(c)(3)(B)(i) through (vi) as GST trusts or to terminate such 
election.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number.
    Books or records relating to this collection of information must be

[[Page 37259]]

retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains amendments to 26 CFR part 26 under section 
2632-1 pertaining to the election under section 2632(c)(5)(A)(i) of the 
Internal Revenue Code to not have the deemed allocation of unused 
generation-skipping transfer (GST) tax exemption under section 
2632(c)(1) apply with regard to certain transfers to a GST trust, as 
defined in section 2632(c)(3)(B) and the election under section 
2632(c)(5)(A)(ii) to treat a trust as a GST trust.
    On July 13, 2004, the IRS published (REG-153841-02) in the Federal 
Register a notice of proposed rulemaking (69 FR 42000). The IRS 
received written and oral comments responding to the notice of proposed 
rulemaking. No public hearing was requested or held. After 
consideration of all the comments, the proposed regulations are adopted 
as amended by this Treasury decision, and the corresponding proposed 
regulations are removed. The comments and revisions to the proposed 
regulations are discussed below.

Summary of Comments

    The proposed regulations generally permitted transferors only two 
options for electing out of the automatic allocation rules. Transferors 
could elect out with respect to a current transfer only, or with 
respect to a current-year transfer and all future transfers to the same 
trust. Several commentators suggested that the final regulations 
provide transferors additional options. In response to these comments, 
the final regulations include the options provided in the proposed 
regulations and, in addition, give transferors the option of electing 
out with respect to (1) only certain designated future transfers to a 
trust, or (2) all future transfers made by the transferor to any trust 
(regardless of whether the trust exists at the time of the election 
out). Under the final regulations, the transferor may elect out with 
respect to future transfers even if the transferor has not made a 
current-year transfer and is not otherwise required to file a Federal 
gift tax return. Examples have been added illustrating language that 
may be used in the election out statement to satisfy the requirements 
for the various election out options.
    One commentator suggested that the statements required by the 
regulations to elect out of the automatic GST allocation or to treat a 
trust as a GST trust should not require a citation to the specific 
regulation section that authorizes the election. The final regulations 
adopt this suggestion.
    In response to comments, the final regulations have been clarified 
to specifically confirm that an election out of the automatic 
allocation rules for future years is limited to automatic allocations 
under section 2632(c) (automatic allocations to indirect skips made 
during the transferor's lifetime) and has no effect on the automatic 
allocation rules that apply after the transferor's death under section 
2632(e).
    One commentator recommended that the IRS clarify whether the 
effective date of an automatic allocation is changed if the transfer is 
reported on a late filed Federal gift tax return. For indirect skips 
made after December 31, 2000, to which section 2642(f) does not apply, 
the transferor's unused GST exemption is automatically allocated to the 
property transferred. Section 26.2632-1(b)(1)(ii) generally provides 
that in the case of direct skips, unless the transferor elects out of 
the automatic allocation rules, the automatic allocation becomes 
irrevocable on the due date for filing the Federal gift tax return, and 
the allocation is effective as of the date of the transfer. Thus, even 
if the Federal gift tax return reporting the transfer is filed late, or 
no Federal gift tax return is filed, the automatic allocation 
nevertheless is irrevocable on the due date of that return and takes 
effect as of the date of the transfer. The final regulations clarify 
that the same rules apply in the case of an automatic allocation to an 
indirect skip under section 2632(c). The automatic allocation is 
effective as of the date of the transfer, and becomes irrevocable on 
the due date for filing the Form 709 for the calendar year in which the 
transfer is made, whether or not a gift tax return is filed reporting 
the transfer.
    Commentators suggested that, if a transferor makes an indirect skip 
and affirmatively allocates GST exemption in an amount that is less 
than the value of the property transferred, the transaction should be 
treated as an allocation of the amount that was affirmatively allocated 
and an election out of the automatic allocation rules for the value of 
the property not covered by the exemption amount affirmatively 
allocated. Treasury and the IRS agree with the commentators that this 
treatment would give effect to the transferor's most likely intent to 
limit the allocation of exemption to the amount that was affirmatively 
allocated. Accordingly, under the final regulations, an affirmative 
partial allocation of GST exemption is treated as an election out of 
the automatic allocation rules with regard to the balance of that 
specific transfer.
    In response to comments, the rules regarding the automatic 
allocation to an indirect skip subject to an estate tax inclusion 
period (ETIP) have been revised in conformance with section 2632(c)(4) 
to provide that the automatic allocation to a direct skip or an 
indirect skip is deemed to be made at the close of the ETIP. Therefore, 
under the final regulations, a transferor may elect out of the 
automatic allocation rules for transfers subject to an ETIP that are 
either direct skips or indirect skips at any time prior to the due date 
of the Federal gift tax return for the calendar year during which the 
ETIP closes. Thus, transferors may elect out of the automatic 
allocation rules on the gift tax return reporting the transfer to the 
trust, or on a gift tax return filed for any calendar year subsequent 
to the year of the transfer up to and including the calendar year in 
which the ETIP closes. It should be noted that 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 with respect to any previous transfer to a trust 
subject to an ETIP that is to close in the future. To apply the 
election out to prior-year transfers that are subject to an ETIP, the 
election out statement must specifically describe the prior-year 
transfers to be covered by the election out, state that those transfers 
are subject to an ETIP, and state that the transferor wishes to elect 
out of the automatic allocation to those prior-year transfers. Except 
in that limited circumstance, the final regulations provide that an 
election out does not apply to any prior-year transfer to a trust, 
including a transfer subject to an ETIP, even if the ETIP closes after 
the election has been made. It should be noted also that, once an 
affirmative allocation of GST exemption has been made (including to a 
transfer subject to an ETIP), the allocation may not be revoked.
    One commentator recommended that transferors who made indirect 
skips after December 31, 2000, and before the proposed regulations 
become final, should be allowed to elect out of the automatic 
allocation rules on or before April 15th of the calendar year after the 
year in which the final regulations are

[[Page 37260]]

published. The Treasury Department and the IRS believe, however, that 
this extension of the time to elect out of the automatic allocation 
rules is unnecessary. Notice 2001-50 (2001-2 C.B. 189) (see Sec.  
601.601(d)(2)(ii)(b) of this chapter) alerted transferors that 
regulations would provide that an election under section 2632(c)(5) is 
to be made on a timely filed Federal gift tax return reporting the 
transfer. Further, the preamble to the proposed regulations provided 
that any election made on or before the date of publication of the 
proposed regulations will be recognized if the election was made on a 
timely filed Federal gift tax return in a manner that provided adequate 
notice to the Commissioner that the transferor made the election. 
Accordingly, this suggestion was not adopted.
    Commentators suggested that the regulations include an example 
addressing the application of the automatic allocation rules for 
indirect skips in a situation in which a trust subject to an ETIP 
terminates upon the expiration of the ETIP, at which time the trust 
assets are distributed to other trusts that may be GST trusts. The 
Treasury Department and the IRS believe, however, that this issue is 
outside the scope of this regulation, and will consider whether to 
address the issue in separate guidance.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It has also been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations, and, because 
these regulations do not impose on small entities, a collection of 
information requirement, the Regulatory Flexibility Act (5 U.S.C. 
chapter 6), does not apply. Therefore, a Regulatory Flexibility 
Analysis is not required. Pursuant to section 7805(f) of the Internal 
Revenue Code, the Notice of Proposed Rulemaking preceding these 
regulations was submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on their impact on small 
business.

Drafting Information

    The principal author of these final regulations is Mayer R. 
Samuels, Office of the Associate Chief Counsel (Passthroughs and 
Special Industries). However, other personnel from the IRS and the 
Treasury Department also participated in their development.

List of Subjects

26 CFR Part 26

    Estate taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 26 and 602 are amended as follows:

PART 26--GENERATION-SKIPPING TRANSFER TAX REGULATIONS UNDER THE TAX 
REFORM ACT OF 1986

0
Paragraph 1. The authority citation for part 26 continues to read, in 
part, as follows:

    Authority: 26 U.S.C. 7805 * * *.

0
Par. 2. In Sec.  26.2600-1, the entries for Sec.  26.2632-1 are amended 
by revising the entry for paragraph (b)(2) and adding entries for 
paragraphs (b)(3), (b)(4) and (e) to read as follows:


Sec.  26.2600-1  Table of contents.

* * * * *


Sec.  26.2632-1  Allocation of GST exemption.

* * * * *
    (b) * * *
    (2)Automatic allocation to indirect skips made after December 
31, 2000.
    (3) Election to treat trust as GST trust.
    (4) Allocation to other transfers.
* * * * *
    (e) Effective date.
* * * * *

0
Par. 3. Section 26.2632-1 is amended as follows:
0
1. Paragraph (b)(2) is redesignated as paragraph (b)(4).
0
2. Paragraphs (b)(2) and (b)(3) are added.
0
3. In newly designated paragraph (b)(4)(i), the third sentence is 
revised.
0
4. In newly designated paragraph (b)(4)(ii)(A)(1), the fourth sentence 
is revised.
0
5. In newly designated paragraph (b)(4)(ii)(B):
0
a. All references to paragraph ``(b)(2)(ii)(A)(1)(i)'' are removed and 
``(b)(4)(ii)(A)(1)(i)'' is added in its place.
0
b. All references to paragraph ``(b)(2)(ii)(A)(1)(ii)'' are removed and 
``(b)(4)(ii)(A)(1)(ii)'' is added in its place.
0
c. All references to paragraph ``(b)(2)(ii)(A)(1)(iii)'' are removed 
and ``(b)(4)(ii)(A)(1)(iii)'' is added in its place.
0
6. Examples 1 through 5 in newly designated paragraph (b)(4)(iii) are 
revised.
0
7. Example 6 in newly designated paragraph (b)(4)(iii) is added.
0
8. Paragraph (b)(4)(iv) is added.
0
9. Paragraph (c)(1) is redesignated as paragraph (c)(1)(i) and revised.
0
10. Paragraphs (c)(1)(ii) and (c)(1)(iii) are added.
0
11. Example 5 in paragraph (c)(5) is added.
0
12. In paragraph (d)(1), the fourth sentence is revised.
0
13. Paragraph (e) is added.
    The additions and revisions read as follows:


Sec.  26.2632-1  Allocation of GST exemption.

* * * * *
    (b) * * *
    (2) Automatic allocation to indirect skips made after December 31, 
2000--(i) In general. An indirect skip is a transfer of property to a 
GST trust as defined in section 2632(c)(3)(B) provided that the 
transfer is subject to gift tax and does not qualify as a direct skip. 
In the case of an indirect skip made after December 31, 2000, to which 
section 2642(f) (relating to transfers subject to an estate tax 
inclusion period (ETIP)) does not apply, the transferor's unused GST 
exemption is automatically allocated to the property transferred (but 
not in excess of the fair market value of the property on the date of 
the transfer). The automatic allocation pursuant to this paragraph is 
effective whether or not a Form 709 is filed reporting the transfer, 
and is effective as of the date of the transfer to which it relates. An 
automatic allocation is irrevocable after the due date of the Form 709 
for the calendar year in which the transfer is made. In the case of an 
indirect skip to which section 2642(f) does apply, the indirect skip is 
deemed to be made at the close of the ETIP and the GST exemption is 
deemed to be allocated at that time. In either case, except as 
otherwise provided in paragraph (b)(2)(ii) of this section, the 
automatic allocation of exemption applies even if an allocation of 
exemption is made to the indirect skip in accordance with section 
2632(a).
    (ii) Prevention of automatic allocation. Except as otherwise 
provided in forms or other guidance published by the Service, the 
transferor may prevent the automatic allocation of GST exemption with 
regard to an indirect skip (including indirect skips to which section 
2642(f) may apply) by making an election, as provided in paragraph 
(b)(2)(iii) of this section. Notwithstanding paragraph (b)(2)(iii)(B) 
of this section, the transferor may also prevent the automatic 
allocation of GST exemption with regard to an indirect skip by making 
an affirmative allocation of GST exemption on a Form 709 filed at any 
time on or before the due date for

[[Page 37261]]

timely filing (within the meaning of paragraph (b)(1)(ii) of this 
section) of an amount that is less than (but not equal to) the value of 
the property transferred as reported on that return, in accordance with 
the provisions of paragraph (b)(4) of this section. See paragraph 
(b)(4)(iii) Example 6 of this section. Any election out of the 
automatic allocation rules under this section has no effect on the 
application of the automatic allocation rules applicable after the 
transferor's death under section 2632(e) and paragraph (d) of this 
section.
    (iii) Election to have automatic allocation rules not apply--(A) In 
general. A transferor may prevent the automatic allocation of GST 
exemption (elect out) with respect to any transfer or transfers 
constituting an indirect skip made to a trust or to one or more 
separate shares that are treated as separate trusts under Sec.  
26.2654-1(a)(1) (collectively referred to hereinafter as a trust). In 
the case of a transfer treated under section 2513 as made one-half by 
the transferor and one-half by the transferor's spouse, each spouse 
shall be treated as a separate transferor who must satisfy separately 
the requirements of paragraph (b)(2)(iii)(B) to elect out with respect 
to the transfer. A transferor may elect out with respect to--
    (1) One or more prior-year transfers subject to section 2642(f) 
(regarding ETIPs) made by the transferor to a specified trust or 
trusts;
    (2) One or more (or all) current-year transfers made by the 
transferor to a specified trust or trusts;
    (3) One or more (or all) future transfers made by the transferor to 
a specified trust or trusts;
    (4) All future transfers made by the transferor to all trusts 
(whether or not in existence at the time of the election out); or
    (5) Any combination of paragraphs (b)(2)(iii)(A)(1) through (4) of 
this section.
    (B) Manner of making an election out. Except as otherwise provided 
in forms or other guidance published by the IRS, an election out is 
made as described in this paragraph (b)(2)(iii)(B). To elect out, the 
transferor must attach a statement (election out statement) to a Form 
709 filed within the time period provided in paragraph (b)(2)(iii)(C) 
of this section (whether or not any transfer was made in the calendar 
year for which the Form 709 was filed, and whether or not a Form 709 
otherwise would be required to be filed for that year). See paragraph 
(b)(4)(iv) Example 7 of this section. The election out statement must 
identify the trust (except for an election out under paragraph 
(b)(2)(iii)(A)(4) of this section), and specifically must provide that 
the transferor is electing out of the automatic allocation of GST 
exemption with respect to the described transfer or transfers. Prior-
year transfers that are subject to section 2642(f), and to which the 
election out is to apply, must be specifically described or otherwise 
identified in the election out statement. Further, unless the election 
out is made for all transfers made to the trust in the current year 
and/or in all future years, the current-year transfers and/or future 
transfers to which the election out is to apply must be specifically 
described or otherwise identified in the election out statement.
    (C) Time for making an election out. To elect out, the Form 709 
with the attached election out statement must be filed on or before the 
due date for timely filing (within the meaning of paragraph (b)(1)(ii) 
of this section) of the Form 709 for the calendar year in which--
    (1) For a transfer subject to section 2642(f), the ETIP closes; or
    (2) For all other elections out, the first transfer to be covered 
by the election out was made.
    (D) Effect of election out. An election out does not affect the 
automatic allocation of GST exemption to any transfer not covered by 
the election out statement. Except for elections out for transfers 
described in paragraph (b)(2)(iii)(A)(1) of this section that are 
specifically described in an election out statement, an election out 
does not apply to any prior-year transfer to a trust, including any 
transfer subject to an ETIP (even if the ETIP closes after the election 
is made). An election out does not prevent the transferor from 
allocating the transferor's available GST exemption to any transfer 
covered by the election out, either on a timely filed Form 709 
reporting the transfer or at a later date in accordance with the 
provisions of paragraph (b)(4) of this section. An election out with 
respect to future transfers remains in effect unless and until 
terminated. Once an election out with respect to future transfers is 
made, a transferor need not file a Form 709 in future years solely to 
prevent the automatic allocation of the GST exemption to any future 
transfer covered by the election out.
    (E) Termination of election out. Except as otherwise provided in 
forms or other guidance published by the IRS, an election out may be 
terminated as described in this paragraph (b)(2)(iii)(E). Pursuant to 
this section, a transferor may terminate an election out made on a Form 
709 for a prior year, to the extent that election out applied to future 
transfers or to a transfer subject to section 2642(f). To terminate an 
election out, the transferor must attach a statement (termination 
statement) to a Form 709 filed on or before the due date of the Form 
709 for the calendar year in which is made the first transfer to which 
the election out is not to apply (whether or not any transfer was made 
in the calendar year for which the Form 709 was filed, and whether or 
not a Form 709 otherwise would be required to be filed for that year). 
The termination statement must identify the trust (if applicable), 
describe the prior election out that is being terminated, specifically 
provide that the prior election out is being terminated, and either 
describe the extent to which the prior election out is being terminated 
or describe any current-year transfers to which the election out is not 
to apply. Consequently, the automatic allocation rules contained in 
section 2632(c)(1) will apply to any current-year transfer described on 
the termination statement and, except as otherwise provided in this 
paragraph, to all future transfers that otherwise would have been 
covered by the election out. The termination of an election out does 
not affect any transfer, or any election out, that is not described in 
the termination statement. The termination of an election out will not 
revoke the election out for any prior-year transfer, except for a 
prior-year transfer subject to section 2642(f) for which the election 
out is revoked on a timely filed Form 709 for the calendar year in 
which the ETIP closes or for any prior calendar year. The termination 
of an election out does not preclude the transferor from making another 
election out in the same or any subsequent year.
    (3) Election to treat trust as a GST trust--(i) In general. A 
transferor may elect to treat any trust as a GST trust (GST trust 
election), without regard to whether the trust is subject to section 
2642(f), with respect to--
    (A) Any current-year transfer (or any or all current-year 
transfers) by the electing transferor to the trust;
    (B) Any selected future transfers by the electing transferor to the 
trust;
    (C) All future transfers by the electing transferor to the trust; 
or
    (D) Any combination of paragraphs (b)(3)(i)(A) through (C) of this 
section.
    (ii) Time and manner of making GST trust election. Except as 
otherwise provided in forms or other guidance published by the Internal 
Revenue Service, a GST trust election is made as described in this 
paragraph (b)(3)(ii). To make a GST trust election, the transferor must 
attach a statement (GST trust election statement) to a Form 709 filed 
on or before the due date for timely filing (within the meaning of 
paragraph (b)(1)(ii) of this section) of the Form 709 for the calendar 
year in which the first

[[Page 37262]]

transfer to be covered by the GST trust election is made (whether or 
not any transfer was made in the calendar year for which the Form 709 
was filed, and whether or not a Form 709 otherwise would be required to 
be filed for that year). The GST trust election statement must identify 
the trust, specifically describe or otherwise clearly identify the 
transfers to be covered by the election, and specifically provide that 
the transferor is electing to have the trust treated as a GST trust 
with respect to the covered transfers.
    (iii) Effect of GST trust election. Except as otherwise provided in 
this paragraph, a GST trust election will cause all transfers made by 
the electing transferor to the trust that are subject to the election 
to be deemed to be made to a GST trust as defined in section 
2632(c)(3)(B). Thus, the electing transferor's unused GST exemption may 
be allocated automatically to such transfers in accordance with 
paragraph (b)(2) of this section. A transferor may prevent the 
automatic allocation of GST exemption to future transfers to the trust 
either by terminating the GST trust election in accordance with 
paragraph (b)(3)(iv) of this section (in the case of trusts that would 
not otherwise be treated as GST trusts) or by electing out of the 
automatic allocation of GST exemption in accordance with paragraph 
(b)(2) of this section.
    (iv) Termination of GST trust election. Except as otherwise 
provided in forms or other guidance published by the Service, a GST 
trust election may be terminated as described in this paragraph 
(b)(3)(iv). A transferor may terminate a GST trust election made on a 
Form 709 for a prior year, to the extent that election applied to 
future transfers or to a transfer subject to section 2642(f). To 
terminate a GST trust election, the transferor must attach a statement 
(termination statement) to a Form 709 filed on or before the due date 
for timely filing (within the meaning of paragraph (b)(1)(ii) of this 
section) a Form 709 for the calendar year: in which is made the 
electing transferor's first transfer to which the GST trust election is 
not to apply; or that is the first calendar year for which the GST 
trust election is not to apply, even if no transfer is made to the 
trust during that year. The termination statement must identify the 
trust, describe the current-year transfer (if any), and provide that 
the prior GST trust election is terminated. Accordingly, if the trust 
otherwise does not satisfy the definition of a GST trust, the automatic 
allocation rules contained in section 2632(c)(1) will not apply to the 
described current-year transfer or to any future transfers made by the 
transferor to the trust, unless and until another election under this 
paragraph (b)(3) is made.
    (4) * * * (i) * * * See paragraph (b)(4)(ii) of this section. * * *
    (ii) * * * (A) * * * (1) * * * For purposes of this paragraph 
(b)(4)(ii), the Form 709 is deemed filed on the date it is postmarked 
to the Internal Revenue Service address as directed in forms or other 
guidance published by the Service. * * *
* * * * *
    (iii) Examples. The following examples illustrate the provisions of 
this paragraph (b):
    Example 1. Modification of allocation of GST exemption. On 
December 1, 2003, T transfers $100,000 to an irrevocable GST trust 
described in section 2632(c)(3)(B). The transfer to the trust is not 
a direct skip. The date prescribed for filing the gift tax return 
reporting the taxable gift is April 15, 2004. On February 10, 2004, 
T files a Form 709 on which T properly elects out of the automatic 
allocation rules contained in section 2632(c)(1) with respect to the 
transfer in accordance with paragraph (b)(2)(iii) of this section, 
and allocates $50,000 of GST exemption to the trust. On April 13th 
of the same year, T files an additional Form 709 on which T confirms 
the election out of the automatic allocation rules contained in 
section 2632(c)(1) and allocates $100,000 of GST exemption to the 
trust in a manner that clearly indicates the intention to modify and 
supersede the prior allocation with respect to the 2003 transfer. 
The allocation made on the April 13 return supersedes the prior 
allocation because it is made on a timely-filed Form 709 that 
clearly identifies the trust and the nature and extent of the 
modification of GST exemption allocation. The allocation of $100,000 
of GST exemption to the trust is effective as of December 1, 2003. 
The result would be the same if the amended Form 709 decreased the 
amount of the GST exemption allocated to the trust.
    Example 2. Modification of allocation of GST exemption. The 
facts are the same as in Example 1 except, on July 8, 2004, T files 
a Form 709 attempting to reduce the earlier allocation. The return 
filed on July 8, 2004, is not a timely filed return. The $100,000 
GST exemption allocated to the trust, as amended on April 13, 2004, 
remains in effect because an allocation, once made, is irrevocable 
and may not be modified after the last date on which a timely filed 
Form 709 may be filed.
    Example 3. Effective date of late allocation of GST exemption. 
On November 15, 2003, T transfers $100,000 to an irrevocable GST 
trust described in section 2632(c)(3)(B). The transfer to the trust 
is not a direct skip. The date prescribed for filing the gift tax 
return reporting the taxable gift is April 15, 2004. On February 10, 
2004, T files a Form 709 on which T properly elects out of the 
automatic allocation rules contained in section 2632(c)(1) in 
accordance with paragraph (b)(2)(iii) of this section with respect 
to that transfer. On December 1, 2004, T files a Form 709 and 
allocates $50,000 to the trust. The allocation is effective as of 
December 1, 2004.
    Example 4. Effective date of late allocation of GST exemption. T 
transfers $100,000 to an irrevocable GST trust on December 1, 2003, 
in a transfer that is not a direct skip. On April 15, 2004, T files 
a Form 709 on which T properly elects out of the automatic 
allocation rules contained in section 2632(c)(1) with respect to the 
entire transfer in accordance with paragraph (b)(2)(iii) of this 
section and T does not make an allocation of any GST exemption on 
the Form 709. On September 1, 2004, the trustee makes a taxable 
distribution from the trust to T's grandchild in the amount of 
$30,000. Immediately prior to the distribution, the value of the 
trust assets was $150,000. On the same date, T allocates GST 
exemption to the trust in the amount of $50,000. The allocation of 
GST exemption on the date of the transfer is treated as preceding in 
point of time the taxable distribution. At the time of the GST, the 
trust has an inclusion ratio of .6667 (1--(50,000/150,000)).
    Example 5. Automatic allocation to split-gift. On December 1, 
2003, T transfers $50,000 to an irrevocable GST Trust described in 
section 2632(c)(3)(B). The transfer to the trust is not a direct 
skip. On April 30, 2004, T and T's spouse, S, each files an initial 
gift tax return for 2003, on which they consent, pursuant to section 
2513, to have the gift treated as if one-half had been made by each. 
In spite of being made on a late-filed gift tax return for 2003, the 
election under section 2513 is valid because neither spouse had 
filed a timely gift tax return for that year. Previously, neither T 
nor S filed a timely gift tax return electing out of the automatic 
allocation rules contained in section 2632(c)(1). As a result of the 
election under section 2513, which is retroactive to the date of T's 
transfer, T and S are each treated as the transferor of one-half of 
the property transferred in the indirect skip. Thus, $25,000 of T's 
unused GST exemption and $25,000 of S's unused GST exemption is 
automatically allocated to the trust. Both allocations are effective 
on and after the date that T made the transfer. The result would be 
the same if T's transfer constituted a direct skip subject to the 
automatic allocation rules contained in section 2632(b).
    Example 6. Partial allocation of GST exemption. On December 1, 
2003, T transfers $100,000 to an irrevocable GST trust described in 
section 2632(c)(3)(B). The transfer to the trust is not a direct 
skip. The date prescribed for filing the gift tax return reporting 
the taxable gift is April 15, 2004. On February 10, 2004, T files a 
Form 709 on which T allocates $40,000 of GST exemption to the trust. 
By filing a timely Form 709 on which a partial allocation is made of 
$40,000, T effectively elected out of the automatic allocation rules 
for the remaining value of the transfer for which T did not allocate 
GST exemption.
    (iv) Example. The following example illustrates language that may 
be used in the statement required under paragraph (b)(2)(iii) of this 
section to elect out of the automatic allocation rules under various 
scenarios:
    Example 1. On March 1, 2006, T transfers $100,000 to Trust B, a 
GST trust described in section 2632(c)(3)(B). Subsequently, on

[[Page 37263]]

September 15, 2006, T transfers an additional $75,000 to Trust B. No 
other transfers are made to Trust B in 2006. T attaches an election 
out statement to a timely filed Form 709 for calendar year 2006. 
Except with regard to paragraph (v) of this Example 1, the election 
out statement identifies Trust B as required under paragraph 
(b)(2)(iii)(B) of this section, and contains the following 
alternative election statements:
    (i) ``T hereby elects that the automatic allocation rules will 
not apply to the $100,000 transferred to Trust B on March 1, 2006.'' 
The election out of the automatic allocation rules will be effective 
only for T's March 1, 2006, transfer and will not apply to T's 
$75,000 transfer made on September 15, 2006.
    (ii) ``Thereby elects that the automatic allocation rules will 
not apply to any transfers to Trust B in 2006.'' The election out of 
the automatic allocation rules will be effective for T's transfers 
to Trust B made on March 1, 2006, and September 15, 2006.
    (iii) ``Thereby elects that the automatic allocation rules will 
not apply to any transfers to Trust B made by T in 2006 or to any 
additional transfers T may make to Trust B in subsequent years.'' 
The election out of the automatic allocation rules will be effective 
for T's transfers to Trust B in 2006 and for all future transfers to 
be made by T to Trust B, unless and until T terminates the election 
out of the automatic allocation rules.
    (iv) ``Thereby elects that the automatic allocation rules will 
not apply to any transfers T has made or will make to Trust B in the 
years 2006 through 2008.'' The election out of the automatic 
allocation rules will be effective for T's transfers to Trust B in 
2006 through 2008. T's transfers to Trust B after 2008 will be 
subject to the automatic allocation rules, unless T elects out of 
those rules for one or more years after 2008. T may terminate the 
election out of the automatic allocation rules for 2007, 2008, or 
both in accordance with the termination rules of paragraph 
(b)(2)(iii)(E) of this section. T may terminate the election out for 
one or more of the transfers made in 2006 only on a later but still 
timely filed Form 709 for calendar year 2006.
    (v) ``Thereby elects that the automatic allocation rules will 
not apply to any current or future transfer that T may make to any 
trust.'' The election out of the automatic allocation rules will be 
effective for all of T's transfers (current-year and future) to 
Trust B and to any and all other trusts (whether such trusts exist 
in 2006 or are created in a later year), unless and until T 
terminates the election out of the automatic allocation rules. T may 
terminate the election out with regard to one or more (or all) of 
the transfers covered by the election out in accordance with the 
termination rules of paragraph (b)(2)(iii)(E) of this section.

    (c) Special rules during an estate tax inclusion period--(1) In 
general--(i) Automatic allocations with respect to direct skips and 
indirect skips. A direct skip or an indirect skip that is subject to an 
estate tax inclusion period (ETIP) is deemed to have been made only at 
the close of the ETIP. The transferor may prevent the automatic 
allocation of GST exemption to a direct skip or an indirect skip by 
electing out of the automatic allocation rules at any time prior to the 
due date of the Form 709 for the calendar year in which the close of 
the ETIP occurs (whether or not any transfer was made in the calendar 
year for which the Form 709 was filed, and whether or not a Form 709 
otherwise would be required to be filed for that year). See paragraph 
(b)(2)(i) of this section regarding the automatic allocation of GST 
exemption to an indirect skip subject to an ETIP.
    (ii) Other allocations. An affirmative allocation of GST exemption 
cannot be revoked, but becomes effective as of (and no earlier than) 
the date of the close of the ETIP with respect to the trust. If an 
allocation has not been made prior to the close of the ETIP, an 
allocation of exemption is effective as of the close of the ETIP during 
the transferor's lifetime if made by the due date for filing the Form 
709 for the calendar year in which the close of the ETIP occurs (timely 
ETIP return). An allocation of exemption is effective in the case of 
the close of the ETIP by reason of the death of the transferor as 
provided in paragraph (d) of this section.
    (iii) Portion of trust subject to ETIP. If any part of a trust is 
subject to an ETIP, the entire trust is subject to the ETIP. See Sec.  
26.2642-1(b)(2) for rules determining the inclusion ratio applicable in 
the case of GSTs during an ETIP.
* * * * *
    (5) * * *

    Example 5. Election out of automatic allocation of GST exemption 
for trust subject to an ETIP. On December 1, 2003, T transfers 
$100,000 to Trust A, an irrevocable GST trust described in section 
2632(c)(3) that is subject to an estate tax inclusion period (ETIP). 
T made no other gifts in 2003. The ETIP terminates on December 31, 
2008. T timely files a gift tax return (Form 709) reporting the gift 
on April 15, 2004. On May 15, 2006, T files a Form 709 on which T 
properly elects out of the automatic allocation rules contained in 
section 2632(c)(1) with respect to the December 1, 2003, transfer to 
Trust A in accordance with paragraph (b)(2)(iii) of this section. 
Because the indirect skip is not deemed to occur until December 31, 
2008, T's election out of automatic GST allocation filed on May 15, 
2006, is timely, and will be effective as of December 31, 2008 
(unless revoked on a Form 709 filed on or before the due date of a 
Form 709 for calendar year 2008).

    (d) * * * (1) * * * A late allocation of GST exemption by an 
executor, other than an allocation that is deemed to be made under 
section 2632(b)(1) or (c)(1), with respect to a lifetime transfer of 
property is made on Form 706, Form 706NA, or Form 709 (filed on or 
before the due date of the transferor's estate tax return) and applies 
as of the date the allocation is filed. * * *
* * * * *
    (e) Effective dates. This section is applicable as provided in 
Sec.  26.2601-1(c), with the following exceptions:
    (1) Paragraphs (b)(2) and (b)(3), the third sentence of paragraph 
(b)(4)(i), the fourth sentence of paragraph (b)(4)(ii)(A)(1), 
paragraphs (b)(4)(iii) and (b)(4)(iv), and the fourth sentence of 
paragraph (d)(1) of this section, which will apply to elections made on 
or after July 13, 2004; and
    (2) Paragraph (c)(1), and Example 5 of paragraph (c)(5), which will 
apply to elections made on or after June 29, 2005.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
Par. 4. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.


0
Par. 5. In Sec.  602.101, paragraph (b) is amended by adding an entry 
in numerical order to the table to read as follows:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       control No.
------------------------------------------------------------------------
 
                                * * * * *
26.2632-1...............................................       1545-1892
 
                                * * * * *
------------------------------------------------------------------------


Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: June 21, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary for Tax Policy.
[FR Doc. 05-12759 Filed 6-28-05; 8:45 am]
BILLING CODE 4830-01-P