Late allocation to CRUT allowed

In IRS Letter Ruling 202134005 released Aug. 27, 2021, the taxpayer requested an extension of time to allocate GST exemption to a charitable remainder unitrust (CRUT).

The donor created and funded the CRUT sometime after Sept. 24, 1985, and before July 29, 1997. The CRUT instrument provided for the annual payment of a unitrust amount for life to the taxpayer’s grandchild. At the grandchild’s death, the remainder of the CRUT would be paid to a charity. The donor and the donor’s spouse elected to split gifts in the year the CRUT was created and hired an accounting firm to prepare their gift tax returns for that year. The accounting firm failed to allocate GST exemption to the CRUT.

The donor died, and the executor of the donor’s estate and the donor’s spouse were made aware of the GST tax consequences of the unitrust payments from the CRUT as the donor’s estate tax return was being prepared. Upon realization of the error, the executor of the taxpayer’s estate and the donor’s spouse requested an extension of time pursuant to Sec. 2642(g) and Regs. Sec. 301.9100-3 to allocate the donor’s and his spouse’s GST exemption to the transfers to the CRUT and requested that the GST exemption allocated to the transfer would be effective on the date of the transfers.

Requests for relief under Regs. Sec. 301. 9100-3 will be granted when the taxpayer provides evidence to establish to the IRS’s satisfaction that the taxpayer acted reasonably and in good faith and that granting relief will not prejudice the interests of the government. A taxpayer is considered to have acted reasonably and in good faith if the taxpayer reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, a regulatory election.¹

Based on the facts submitted and the representations made by the taxpayer, the IRS concluded that the requirements of Regs. Sec. 301.9100-3 were satisfied. As a result, the donor’s executor and spouse were granted an extension of 120 days from the date of the ruling to allocate their available GST exemption to the transfer to the CRUT.

This CRUT was created before the automatic allocation rules for GST trusts came into existence in 2001;² otherwise, the taxpayers would not have had to make these requests, as GST exemption would have been automatically allocated to the CRUT. The transfer to the CRUT is not a direct skip because the charity is always considered a nonskip person. Had the IRS not granted the taxpayers an extension of time to allocate GST exemption to the CRUT, the unitrust payments to the grandchild would have been taxable distributions, which would have required the grandchild to pay GST tax from the distribution he or she received from the CRUT.