Estate Plan Pitfall: Automatic Allocation of GST Exemption

Many estate planning clients put a lot of time, energy and money into structuring their estate plans in light of the uncertainties in our estate tax laws. These more complicated tax-motivated estate plans can produce additional tax problems for the unwary estate planning attorney and client.

Private Letter Ruling 200709010 addresses the situation where an estate planning client creates an estate plan intending to effectively use their $1 million generation skipping transfer tax exemption, but the client continues to make post-December 31, 2000 transfers to their irrevocable trust which benefits their grandchildren or other “skip persons.”

As the private letter ruling indicates, the transfers to such irrevocable trust are “indirect transfers” that automatically use up the estate planning client’s unused generation skipping transfer tax exclusion amount if the estate planning client does not elect out of the automatic allocation. This election has to be made by the client by filing an “election out” statement to their Form 709 Federal Gift Tax Return for the year in which the gift is completed.

If the estate planning client does not make this automatic allocation election, then the estate planning client may not have a sufficiently large generation skipping transfer tax exemption upon his or her demise, as may be required by the estate planning client’s estate planning documents.

Luckily the IRS, as is the case in this private letter ruling, is generally willing to allow estate planning clients to make this election by submitting a private letter ruling request prior to the IRS discovering the issue.

Clients who intend to take full advantage of their generation skipping transfer tax exemption should contact their estate planning attorney to review their estate plan in light of this issue.