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A married couple did everything right. One spouse signed an irrevocable trust whose primary purpose was to benefit descendants, funded it from investment accounts, and told the accountant the trust was meant to benefit future generations. The plan was to make the gift exempt from the generation-skipping transfer (GST) tax. Then the accountant checked the wrong box on both spouses' gift tax returns.
On October 2, 2026, the IRS released two companion private letter rulings, PLR 202640002 and PLR 202640005, giving each spouse 120 days to fix the mistake. The couple got a happy ending. The way they got it carries lessons for any family that funds a long-term trust meant to benefit grandchildren.
The GST Tax in Plain English
The GST tax is a second, flat tax at the top estate tax rate (40%) on certain transfers that skip a generation. It applies on top of any gift or estate tax. The Code reaches three kinds of generation-skipping transfers: a direct gift to a grandchild or similar "skip person," a distribution from a trust to one, and the point at which a trust passes to that younger generation. Most gifts to grandchildren never incur the tax, because of the annual exclusion and the exemption.
Each person has a GST exemption, which for 2026 is $15 million, matching the estate and gift exclusion. The exemption does nothing until it is allocated to a gift or trust. A sufficient allocation gives the transfer a zero inclusion ratio, generally shielding it and its future growth from GST tax. Later additions to the trust need their own allocation. Miss the allocation, and decades of appreciation can sit exposed to a 40% tax when the grandchildren finally receive it.
The Checkbox: Automatic Allocation and the Opt-out
The Internal Revenue Code tries to help. Under § 2632(c), a donor's unused GST exemption is allocated automatically to an "indirect skip," a taxable gift to a "GST trust." That term covers many trusts that could pass wealth to grandchildren, but the statute carves out several common designs, so not every such trust qualifies. A donor may opt out of automatic allocation under § 2632(c)(5) by making an election on the federal gift tax return, Form 709.
There are sound reasons to opt out, for example when a trust will benefit only children and the donor wants to save exemption for later. Here there was no such reason. The rulings state the accountant "mistakenly" made the opt-out election on each spouse's return. The plan said one thing; the returns said the opposite.
Why Gift-splitting Doubled the Problem
The couple consented to gift-splitting under § 2513, which lets spouses treat a gift by one as made half by each. It is a common way to use both spouses' exclusions on a single gift.
For GST purposes, though, each spouse is treated as the transferor of half the gift. Each spouse's exemption applies only to that spouse's half, and the opt-out sat on both returns. One wrong election became two, and fixing it took two separate ruling requests. That is why the IRS issued two rulings for one gift.
How the IRS Fixed It
The next year, the couple hired a new accountant, who caught the error together with the attorney who drafted the trust. Each spouse then asked the IRS for an extension of time under § 2642(g) and Treas. Reg. § 26.2642-7. Those final regulations, effective May 6, 2024, set the specific standards for this type of GST relief and expressly allow relief from an erroneous opt-out. Both rulings were decided under them.
The regulations require two showings. First, the donor acted reasonably and in good faith, judged by factors such as intent, lack of awareness despite reasonable diligence, and reasonable reliance on a qualified tax professional. Second, relief will not prejudice the government, which looks for hindsight, delay, and intervening taxable distributions.
The facts here fit. The donor had told the first accountant the trust was for future generations. Each spouse represented that the trust had made no distributions, that the spouse had made no earlier GST gifts, and that enough exemption remained. The IRS found the regulations satisfied and gave each spouse 120 days to allocate exemption on an amended Form 709.
Why not simply make a late allocation, which the Code allows without IRS permission? Because under § 2642(b)(3), a late allocation generally uses the trust's value when the allocation is made, not when the gift was made. If the trust has grown, covering the same gift takes more exemption, and if it has grown past the exemption remaining, part of the trust stays exposed. A timely allocation instead uses the gift's value as finally determined for gift tax purposes. The relief the IRS granted extended the time for that allocation, so it can rely on the original gift value. That is exactly why the no-prejudice showing matters: the IRS will not let a family choose its valuation date with hindsight.
Don't Count on a Rescue
A private letter ruling binds the IRS only as to the taxpayer who asked for it; under § 6110(k)(3) others cannot cite it as precedent. It shows how the IRS is thinking, nothing more.
The rescue is also expensive and slow. Each request carries the full letter-ruling user fee plus professional fees. These requests went in on December 30, 2025, and the rulings are dated June 30, 2026: six months of waiting, times two. Had the IRS found the error first, or had the trust already paid out to grandchildren, the outcome could have been harder.
Why this Matters if You Aren't a Millionaire
Most families reading this will never owe GST tax at a $15 million exemption. The lesson is broader: elections on a tax return can quietly defeat a carefully drafted plan. Three situations illustrate the risk.
- Gifts to Irrevocable Trusts Generally: Any gift to a trust above the $19,000 annual exclusion typically requires a Form 709. That includes many asset protection trusts used in Medicaid planning. GST allocation is rarely the main concern there; those trusts are built around the look-back period, income, and control. But the return is often prepared by someone who never saw the trust, and every election on it should match what the trust was designed to do.
- Long-term Trusts for Grandchildren: Exemption amounts change with Congress. Allocating GST exemption to a trust that may last decades is inexpensive insurance against a lower future exemption and a larger trust.
- Portability After a Spouse's Death:. The same week, in PLR 202640003, the IRS gave an estate below the filing threshold 120 days to file a late Form 706 and elect portability of the deceased spouse's unused exclusion. That election is optional, easy to overlook, and can be worth millions to the survivor's heirs. It is the version of this mistake most families are likely to face.
A trust is only as good as the paperwork that follows it. This couple was fortunate: their advisers caught the error, the IRS was forgiving, and the trust had not yet paid anything out. The better path is to make sure the gift tax return says what your plan says the first time.
