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his article is the third installment
The IRS ruled that GST exemption was
Tof an annual update on recent
developments in trust, estate, and gift automatically allocated to the transfers to the
taxation. The first two installments
appeared in the November and De- trust even though the gift tax return failed to
properly account for the automatic allocation.
cember issues, respectively. The update
covers developments in estate and gift
tax returns and planning during July the GST tax payable with respect to the 2632(c)(3)(B)(ii), more than 25% of the
2021 through July 2022. trust. Any unappointed assets of a child’s trust corpus either must be distributed
separate trust would continue in trust for to the estate or estates of one or more of
Generation-skipping the benefit of his or her descendants. such individuals or is subject to a gen-
transfer tax The taxpayer transferred nonvoting eral power of appointment exercisable
Automatic allocation of GST partnership units in a limited partner- by one or more such persons.
exemption to GST trust allowed ship to the trust. The taxpayer reported The IRS concluded that more than
In IRS Letter Ruling 202210010 the transfers to the trust on her Form 25% of the trust would be subject to a
released on March 11, 2022, the IRS 709, United States Gift (and Generation- general power of appointment held by
ruled that an individual’s generation- Skipping Transfer) Tax Return, for the the children (nonskip persons) if GST
skipping transfer (GST) exemption was year of the transfers. However, the exemption was not allocated to more
automatically allocated to a transfer to transfers to the trust were incorrectly re- than 25% of the trust. It then con-
a trust even though the individual im- ported on Form 709, Schedule A, Part 1, cluded, however, that the general power
properly reported the transfer on her gift Gifts Subject Only to Gift Tax, instead of of appointment contingent upon the
tax return. on Schedule A, Part 3, Indirect Skips and inclusion ratio of the trust did not, in
The taxpayer established an irrevo- Other Transfers in Trust. Furthermore, this case, prevent the trust from being
cable trust for the benefit of her descen- the automatic allocation of the GST a GST trust at the time of the transfer
dants. During the taxpayer’s lifetime, the exemption was not reported on Schedule to the trust.
trustee could distribute the income and D, Computation of Generation-Skipping The IRS next addressed the failure
principal of the trust to her descendants Transfer Tax. to correctly report the transfers on
in the trustee’s discretion to provide for The taxpayer requested a ruling that the taxpayer’s gift tax return. The IRS
their health, education, maintenance, and GST exemption was automatically concluded that the failure to correctly
support. Upon the taxpayer’s death, the allocated to the transfers of the partner- report the transfers did not amount to
trust would divide into separate shares for ship units. an election out of the GST exemption
the benefit of each of her children and his The IRS first addressed whether the automatic allocation rules to a GST
or her descendants. During each child’s trust was a “GST trust” to which GST trust because no election statement
life, the trustee could distribute principal exemption is automatically allocated. making the election was attached to
and income in the trustee’s discretion to Sec. 2632(c)(3)(B) defines a “GST trust” the gift tax return. Because the trust
the child and his or her descendants to as a trust that could have a generation- met the definition of a GST trust, the
provide for their health, education, main- skipping transfer with respect to the IRS ruled that GST exemption was
tenance, and support. transferor. However, this provision also automatically allocated to the transfers
At the death of a child, he or she lists six exceptions to the definition. In to the trust even though the gift tax
would have a limited power to appoint particular, Sec. 2632(c)(3)(B)(ii) provides return failed to properly account for the
the remainder of his or her trust to any an exception if more than 25% of the automatic allocation.
person or entity other than the child’s trust corpus must be distributed to, or The key to the IRS’s ruling is that
estate, the child’s creditors, or the credi- may be withdrawn by, nonskip persons the testamentary general power of ap-
tors of the child’s estate. Each child also who are living on the date of death of pointment was a “contingent” power
would have a general power to appoint another person identified in the trust that had not yet manifested at the time
to the creditors of his or her estate an who is more than 10 years older than of the transfers to the trust. Therefore,
amount with a value equal to the great- such person. Sec. 2632(c)(3)(B)(iii) pro- the testamentary general power of ap-
est amount that produces the lowest vides an exception if the trust instrument pointment at the time of the transfers
sum of: (1) the transfer taxes payable provides that if one or more skip persons was not an absolute right to withdraw
with respect to the child’s estate and (2) die on or before a date described in Sec. more than 25% of the trust corpus.

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