PLR 1024012: IRS approved a QPRT modification and treated a new term interest as a gift

Plain-English summary

A settlor proposed modifying and restating a qualified personal residence trust so that the settlor’s child could grant the settlor a new term interest in the residence. The IRS ruled that the special valuation rules for retained interests under § 2702 would not apply, provided the modified trust remained substantially similar to the applicable QPRT model and the residence continued to qualify. The IRS also ruled that the child’s grant of the term interest would be a gift to the settlor for gift tax purposes. The letter did not rule on whether the residence would be included in the settlor’s gross estate under § 2036.

Ruling snapshot

• Question: What are the gift tax consequences of modifying and restating a qualified personal residence trust?
• Outcome: Approved
• Key authorities: IRC §§ 2501, 2514, 2702, and 6110

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201024012 Third Party Communication: None
Release Date: 6/18/2010 Date of Communication: Not Applicable
Index Number: 2702.02-02
Person To Contact:
------------------------------------ -----------------------------------------------------
-------------------------------------------- Telephone Number:
-------------------------------- ---------------------
Refer Reply To:
In Re: CC:PSI:B04
--------------------------------------------------- PLR-139146-09
------------------------------------------------------------ Date:
-- February 03, 2010

Legend

Settlor = ----------------------------------------------------
Spouse = ----------------------
Residence = --------------------------------------------------------------------------------------

Trust = ---------------------------------------------------------------------------------------
Son = -----------------------------------------------
Date 1 = ------------------
Date 2 = ----------------
Date 3 = ------------------
X = ---
Y = --
Year 1 = -------

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 and proposed amendment and restatement to a trust.

     The facts submitted are as follows:

PLR-139146-09 2

   Prior to Date 1, Settlor owned Residence outright. On Date 1, Settlor deeded her

interest in Residence to Trust. Trust provides that Settlor would retain a term interest to
possess and occupy Residence for X years.

   Article V, Section C of Trust provides, in relevant part, that upon the expiration of

the X 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 one child, Son. Son is an adult and the remainder beneficiary of

Trust.

   On Date 2, Settlor, in her capacity as trustee of Trust, with the joinder and

consent of Son, executed Modification to modify Trust. Modification is effective on Date

3. Modification provides that upon the expiration of the X year period, Settlor’s issue
   are granted the power to appoint an equal share of the corpus of the Trust 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, Settlor’s Spouse, or
   both, as a gift by Settlor’s children.

   Son intends to amend and restate Trust to grant a Y year term interest to Settlor
   to possess and occupy Residence on or before Date 3.

You have requested the following rulings:

1. Sections 2702(a) and 2702(a)(2) will not apply to the modification and proposed
  amendment and restatement of Trust.

2. Upon executing the amendment and restatement of Trust in which Son grants a
  term interest to Settlor, Son will make a transfer of property by gift within the
  meaning of § 2501 to Settlor.

LAW AND ANALYSIS

   Section 2501(a) provides that a tax is imposed for each calendar year on the

transfer of property by gift during such calendar year.
PLR-139146-09 3

   Section 2511(a) provides that the gift tax applies whether the transfer is in trust

or otherwise, whether the gift is direct or indirect and whether the property is real or
personal, tangible or intangible.

   Section 2514(b) provides that the exercise or release of a general power of

appointment shall be deemed the transfer of property by the individual possessing the
power.

   Section 2514(c) provides that the term “general power of appointment” means a

power which is exercisable in favor of the individual possessing the power, his estate,
his creditors, or creditors of his estate.

    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
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
PLR-139146-09 4

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
§ 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 modification and
proposed amendment and restatement of Trust, as long as this modification and
proposed amendment and restatement, pursuant to which Residence will be transferred
from Son 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). We also conclude that, upon executing the
amendment and restatement, Son will be transferring a term interest in residence to
Settlor by gift within the meaning of § 2501.

     In accordance with the Power of Attorney on file with this office, a copy of this

letter is being sent to your authorized representative.
PLR-139146-09 5

    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: