PLR 201014044: IRS approves a qualified personal residence trust modification

Plain-English summary

The IRS ruled on a proposed modification to a qualified personal residence trust holding a residence for a settlor and family members. The modification would allow the adult remainder beneficiaries to appoint the trust corpus to themselves or, by unanimous agreement, amend the trust to grant a new term interest to the settlor, spouse, or both. The IRS ruled that sections 2702(a)(1) and 2702(a)(2) would not apply if the modification was substantially similar to the QPRT sample provisions, the trust operated consistently with its instrument, and the residence qualified as a personal residence. The ruling expressly did not address whether the residence would be included in the settlor’s gross estate under section 2036.

Ruling snapshot

• Question: Would sections 2702(a)(1) and 2702(a)(2) apply to the proposed modification of a qualified personal residence trust?
• Outcome: Approved
• Key authorities: IRC §§ 2702, 2036, and 6110(k)(3); Treas. Reg. § 25.2702-5; Rev. Proc. 2003-42

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201014044
Third Party Communication: None
Release Date: 4/9/2010
Date of Communication: Not Applicable
Person To Contact:
Index Number: 2702.02-02
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Telephone Number:
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Refer Reply To:
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CC:PSI:B04
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PLR-139153-09
In Re: Date:
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December 16, 2009
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LEGEND:

Settlor = --------------------------------------------------
Residence = -----------------------------------------------------------------------------
--------------------------------
Child 1 = ---------------------------------------
Child 2 = ------------------------------------------------
Child 3 = ------------------------------------------------
Child 4 = ------------------------------------------------
Spouse = -------------------------------------------------
Trust = -------------------------------------------------------
---------------------------
Date 1 = --------------------------
Date 2 = ------------------
Date 3 = --------------------------
Year 1 = -------
Modification = ---------------------------------------------------------------------------
y = ----
z = --

Dear ------ ----------:

This responds to your July 1, 2009 letter and other correspondence requesting a ruling under § 2702 of the Internal Revenue Code with respect to the proposed modification to a trust.

The facts submitted are as follows:

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Prior to Date 1, Settlor owned Residence outright. On Date 1, Settlor deeded his interest in Residence to Trust. Trust provides that Settlor would retain a term interest to possess and occupy Residence for y years.

Article V, Section C of Trust provides, in relevant part, that upon the expiration of the y year period, if Settlor is still living, Settlor’s retained interest and any interest of Settlor’s spouse, Spouse, is to expire and Trust is to continue for the benefit of Settlor’s issue. Trust is to terminate and be distributed per stirpes to Settlor’s issue in complete liquidation of Trust on the later to occur of Settlor’s death or Spouse’s death.

Spouse served as trustee of Trust. Trust was intended to qualify as a qualified personal residence trust (QPRT) as described in § 25.2702-5(c). Settlor reported the transfer of Residence to Trust on a Form 709, United States Gift (and Generation-Skipping Transfer) Tax return, for Year 1.

Settlor has four children, Child 1, Child 2, Child 3, and Child 4. Children 1-4 are all adults and are the remainder beneficiaries of Trust.

On Date 2, Settlor and Spouse, in her capacity as trustee of Trust, with the joinder and consent of Children 1-4, executed Modification to modify Trust. Modification is effective on Date 3. Modification provides that upon the expiration of the y year period, Children 1-4 are each granted the power to appoint an equal share of the corpus of the Trust estate to themselves, or by unanimous agreement, they may direct the trustee to amend and restate the terms of Trust so as to provide a term interest to Settlor, Spouse, or both, as a gift by Settlor’s children.

Children 1-4 intend to amend and restate Trust to grant a z year term interest to Settlor to possess and occupy Residence on or before Date 3.

You have requested a ruling that §§ 2702(a)(1) and 2702(a)(2) will not apply to the proposed modification to Trust.

LAW AND ANALYSIS

Section 2702(a)(1) provides that, solely for purposes of determining whether a transfer of an interest in trust to (or for the benefit of) a member of the transferor's family is a gift (and the value of such transfer), the value of any interest in such trust retained by the transferor or any applicable family member (as defined in § 2701(e)(2)) shall be determined as provided in § 2702(a)(2).

Section 2702(a)(2) provides that the value of any retained interest that is not a qualified interest is treated as being zero. The value of any retained interest that is a qualified interest is determined under § 7520.

Section 2702(a)(3)(A)(ii) provides that § 2702(a) shall not apply to any transfer if such transfer involves the transfer of an interest in trust all the property in which

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consists of a residence to be used as a personal residence by persons holding term interests in such trust.

Section 25.2702-5(a)(1) of the Gift Tax Regulations provides, in part, that § 2702 does not apply to a transfer in trust meeting the requirements of that section. A transfer in trust meets the requirements of the section only if the trust is a personal residence trust (as defined in § 25.2702-5(b)). A trust meeting the requirements of a qualified personal residence trust (as defined in § 25.2702-5(c)) is treated as a personal residence trust.

Section 25.2702-5(c)(1) provides that for purposes of § 2702(a)(3)(A)(ii), a qualified personal residence trust is a trust meeting all the requirements of the section. These requirements must be met by provisions in the governing instrument, and these governing instrument provisions must by their terms continue in effect during the existence of any term interest in the trust.

Section 25.2702-5(c)(5) provides that, in general, except as otherwise provided in § 25.2702-5(c)(5)(ii) and § 25.2702-5(c)(8), the governing instrument of a qualified personal residence trust must prohibit the trust from holding, for the entire term of the trust, any asset other than one residence to be used or held for use (within the meaning of § 25.2702-5(c)(7)(i)) as a personal residence of the term holder. Under § 25.2702-5(c)(5)(ii), the trust may hold certain assets listed in that section in addition to the personal residence.

Section 25.2702-5(c)(2)(i) provides that a personal residence of a term holder is either the principal residence of the term holder (within the meaning of § 1034); one other residence of the term holder (within the meaning of § 280A(d)(1) but without regard to § 280A(d)(2)); or an undivided fractional interest in either.

Section 25.2702-5(c)(2)(ii) provides that a personal residence may include appurtenant structures used by the term holder for residential purposes and adjacent land not in excess of that which is reasonably appropriate for residential purposes (taking into account the residence's size and location).

Section 25.2702-5(c)(2)(iii) provides that a residence is a personal residence only if its primary use is as a residence of the term holder when occupied by the term holder. A residence is not used primarily as a residence if it is used to provide transient lodging and substantial services are provided in connection with the provision of lodging (e.g., a hotel or a bed and breakfast). A residence is not a personal residence if, during any period not occupied by the term holder, its primary use is other than as a residence.

Section 4.01(52) of Rev. Proc. 2008-3, 2008-1 I.R.B. 110, 118, provides that rulings will not ordinarily be issued on whether a trust with one term holder satisfies the requirements of § 2702(a)(3)(A) and § 25.2702-5(c) to be a QPRT. Rev. Proc. 2003-42, 2003-1 C.B. 993, provides sample trust provisions for QPRTs. The Service will recognize a trust as meeting all of the requirements of § 2702(a)(3)(A) and

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§ 25.2702-5(c) if the trust instrument is substantially similar to the sample in section 4 of Rev. Proc. 2003-42 and the trust operates in a manner consistent with the terms of the trust instrument and is a valid trust under applicable local law.

Accordingly, based on the facts submitted and the representations made, we conclude that §§ 2702(a)(1) and 2702(a)(2) will not apply to the proposed modification of Trust, as long as this modification, pursuant to which Residence will be transferred from Children 1-4 to Settlor is substantially similar to the sample in section 4 of Rev. Proc. 2003-42 and the trust operates in a manner consistent with the terms of the trust instrument and is a valid trust under applicable local law, and if Residence qualifies as a personal residence as defined in § 25.2702-5(c)(2).

In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative.

Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Specifically, no opinion is expressed or implied concerning whether the transfer of Residence to Settlor, pursuant to the modification of Trust, would result in Residence being included in the gross estate of Settlor under § 2036.

The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of provides that it may not be used or cited as precedent.

Sincerely,

_______
Lorraine E. Gardner
Senior Counsel, Branch 4
Office of the Associate Chief Counsel
(Passthroughs and Special Industries)

Enclosure:
Copy of letter for section 6110 purposes

cc: