Friday, June 3, 2011

Deferring Payment of the Generation-Skipping Tax

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The recent publication of Private Letter Ruling 200939003 by the IRS is a timely reminder of the potential use of IRC §6166 to defer payment of the generation-skipping transfer tax. In the ruling, Grandfather had established a trust for Child, funding it with the stock of an S corporation. Child was to receive the trust assets upon reaching a specified age, but died before attaining that age. Under these circumstances, the trust provided that the assets were to remain in further trust for Grandchild, causing a taxable termination subject to the GST tax.

The trust presumably still held the S corporation stock, because the trustee sought a ruling that it could elect under IRC §6166 to pay the GST tax in installments. The trustee pointed out that §2661(2) states that, if a generation-skipping transfer occurs as a result of and at the same time as the death of an individual (as happened here), "all provisions of subtitle F . . . applicable to the estate tax . . . are hereby made applicable in respect of the generation-skipping transfer tax." Section 6166 is found in subtitle F, and it would seem that §6166 relief was available.

But the Service denied the request, observing that it would be difficult to apply §6166 in the context of the GST tax. Furthermore, it pointed out that §6166(i) provides that §6166 deferral is available for the GST tax only when the closely held business is the subject of a direct skip occurring "at the same time as and as a result of the decedent's death."   

Although the trustee's request was unsuccessful, this ruling is a useful reminder that, under the right circumstances, there are opportunities for deferring payment of the GST tax. If any reader has successfully done this, or contemplated doing it, we would be interested in their comments.

— Harold W. Pskowski, Managing Editor for Estates, Gifts and Trusts

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