New Generation-Skipping Tax Regulations Offer a Crucial Lifeline

The IRS’s final generation-skipping tax, or GST, exemption regulations offer exciting news for taxpayers by ultimately providing more relief options than ever before.

What Changed?

Previously, there was no way to revoke an erroneous GST exemption election, meaning taxpayers who made election mistakes often were stuck with the consequences. This carried potential for missed tax-saving opportunities from inefficient use of their available GST exemption.

The final regulations, issued May 3, open the door for relief to be granted via a private letter ruling when a taxpayer makes an erroneous GST “opt-in” or “opt-out” election—flexibility that wasn’t in the proposed regulations. The preamble to the final regulations acknowledges there is no statutory authority for the position that “opt-in” and “opt-out” elections are irrevocable once made.

Taxpayer Impact

While the new regulations offer a welcome path for revoking past GST elections in some situations, it’s important to understand the process involved.

Effective May 6, GST exemption related relief under Section 2642(g)(1) of the tax code will now be granted under Treas. Reg. 26.2642-7. Obtaining relief under the final regulations will still require requesting a private letter ruling from the IRS, which charges substantial user fees for them.

Taxpayers often will incur additional legal and accounting fees when preparing a private letter ruling request and meeting with the IRS Chief Counsel. For many, the combined costs of a private letter ruling may not be feasible, and there is no guarantee that relief will be granted.

Also, taxpayers bear the burden of proving they have acted reasonably and in good faith, that they aren’t using hindsight, and that it wouldn’t prejudice the interests of the government if relief were granted.

Future Simplified Relief?

The final regulations acknowledge commenters’ concerns about the complexity of the GST rules and the cost of obtaining relief through private letter rulings. The IRS concluded that private letter rulings remain the most efficient way to address these requests, although they recognize the burden this places on some taxpayers.

The IRS and Treasury Department state that they are open to issuing further revenue procedures or other guidance for simplifying relief under Section 2642(g)(1). They reference existing simplified procedures such as Rev. Proc. 2004-46 and 2004-47 as examples, which suggests a willingness to explore similar options for simplified GST relief.

The IRS doesn’t commit to a specific timeline for simplified procedures. It indicates it will issue additional guidance when it identifies situations where automatic or simplified relief is appropriate and administrable.

Outlook

The new regulations empower taxpayers and advisers to evaluate certain past GST elections, potentially rectifying errors through the Treas. Reg. 26.2642-7 relief process.

Advisers should conduct comprehensive reviews of their clients’ GST exemption allocations and elections to ensure they align with the desired GST status of specific trusts.

By identifying situations where revoking a prior inadvertent election might be beneficial, advisers can help clients optimize their GST exemption allocation strategies.

The reference in the preamble to potentially issuing simplified procedures for granting relief offers a glimmer of hope for the future. While private letter rulings remain the primary path for obtaining relief, the potential for a more streamlined process in the coming years is encouraging.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Carol Warley is partner at RSM US Washington National Tax in Houston.

Amber Waldman is senior director at RSM US Washington National Tax in McLean, Va.

Tandilyn Cain is a senior manager at RSM US Washington National Tax in Seattle.

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