IRS Grants Filing Extension to Opt Out of GST Tax Allocation
In Private Letter Ruling 202633002 (Aug. 14, 2026), the taxpayer set up a series of grantor retained annuity trusts (GRATs) over many years, each with varying terms. Specifically, the taxpayer created a 2-, 3- and 4-year GRAT in Year 1, 2-year GRATs in Years 6 and 7 and a 2-year GRAT in Year 9. At the end of each term, the remainder, if any, was distributed to an irrevocable trust established by the taxpayer. There were multiple irrevocable trusts established to receive the GRAT remainders, but all were classified as GST trusts under Internal Revenue Code Section 2632 with potential distributions to a skip person.
The taxpayer wasn’t fully advised by the drafting lawyers, their family office or their accounting firm to file gift tax returns that opt out of the automatic GST tax allocation to a trust classified as a GST trust. Gift tax returns were filed for some, but not all, years, and the returns that were filed didn’t opt out of the automatic GST tax exemption allocation.
The mistake was discovered on the taxpayer’s death, and the estate requested an extension of time to elect out of the automatic allocation of GST tax exemption for the funding of the GRATs.
Under the GST regulations, GST tax exemption is automatically allocated to all indirect skips. For a transfer that’s subject to inclusion in the taxpayer’s estate for a certain period (known as the “estate tax inclusion period” (ETIP)), the taxpayer may elect out of automatic allocation on or before the due date for a gift tax return relating to a transfer in the year in which the ETIP closes. For a GRAT, this means that the election out must be made on a gift tax return filed for the year in which the last annuity is paid.
Treas. Regs. Section 26.2642-7 sets forth the procedures for requesting an extension of time to allocate GST tax exemption, and the standards used to determine whether relief may be granted. Treas. Regs. Section 26.2642-7(d)(1) provides that requests for relief will be granted when and to the extent that the transferor or the executor of the transferor’s estate provides evidence establishing to the satisfaction of the IRS that the transferor or the executor of the transferor’s estate acted reasonably and in good faith and that the grant of relief will not prejudice the interests of the government.
Here, the IRS granted the taxpayer’s request for relief, finding that the estate had provided sufficient evidence that the taxpayer had acted in good faith and reasonably relied on their advisors.
The PLR didn’t explain some statements regarding the ETIP period for each GRAT. As noted above, the taxpayer created a 2-, 3- and 4-year GRAT in Year 1, and the ruling said the ETIP for the 3- and 4-year GRATs ended when the GRATs ended. The 2-year GRAT terminated before Jan. 1, 2001, when the deemed GST tax allocation rule under Section 2632(c) became effective, and the ruling didn’t mention when the ETIP ended because the automatic allocation rule wouldn’t apply.
However, the PLR said that the 2-year GRATs created in Years 6 and 7 weren’t subject to ETIP because, under Treas. Regs. Section 26.2632-1(c)(2)(ii)(A), the possibility that the assets would be included in the grantor’s estate was so remote as to be negligible (that is, a less than 5% probability). Why were the GRATs created in Years 6 and 7 not subject to ETIP, but the GRATs from Years 1 and 9 were subject to ETIP? The grantor was older in Year 9 than in Years 6 and 7, so perhaps the probability of death during the term of the Year 9 GRATs passed the 5% mark. And perhaps, way back in Year 1, the probability of death during a 3- or 4-year GRAT was more than 5%, but that’s hard to fathom if, six years later, the probability was less than 5% for a 2-year GRAT—a mystery.
