PLR 201144001: IRS approves tax treatment for a modified personal residence trust

Plain-English summary

The taxpayer transferred a residence to a trust intended to qualify as a qualified personal residence trust. The taxpayer later proposed modifying and restating the trust so the taxpayer's children could grant the taxpayer a new term interest in the residence. The IRS concluded that § 2702 would not apply to the modification if the trust instrument substantially followed the prescribed sample provisions, the trust operated consistently with those terms, local law recognized the trust, and the residence qualified as a personal residence. The IRS also concluded that the children would make a gift to the taxpayer when granting or extending the term interest. The ruling expressed no opinion on whether the residence would be included in the taxpayer's gross estate under § 2036.

Ruling snapshot

• Question: Will the proposed modification and restatement of the personal residence trust avoid § 2702 treatment, and will the children's grant of a new term interest be a gift?
• Outcome: approved
• Key authorities: IRC §§ 2501, 2511, 2514, 2702, and 2036; Treas. Reg. § 25.2702-5

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201144001
Third Party Communication: None
Release Date: 11/4/2011
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
In Re: PLR-103875-11
-------------------------------------------------------- Date:

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July 25, 2011

Legend

Settlor = ----------------------------------------------------------
Residence = -------------------------------------------------------------------------------------
------------------------------------------------------
Trust = ---------------------------------------------------------------------------------
--------------------------
Modification = ---------------------------------------------------------------------------------------
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Daughter = -----------------------------------------------------------
Son 1 = --------------------------------------------------
Son 2 = ---------------------------------------------------
Son 3 = ------------------------------------------------------
Date 1 = -------------------------
Date 2 = -------------------
Date 3 = -------------------------
X = --
Y = --
Year = -------

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

This letter responds to your authorized representative’s letter of December 17, 2010, and subsequent correspondence, requesting rulings under §§ 2501 and 2702 of the Internal Revenue Code (Code) with respect to the modification and amendment and restatement to a trust.

The facts submitted are as follows:
PLR-103875-11
2

Prior to Date 1, Settlor owned Residence. 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 X years.

Article V, Section B of Trust provides, in relevant part, that upon the expiration of the X-year period, if Settlor is still living, Settlor’s retained interest will expire and Trust will continue for the benefit of Settlor’s issue.

Article V, Section C provides that upon the death of Settlor, Trust will terminate and be distributed per stirpes to Settlor’s issue in complete liquidation of Trust.

Settlor is the sole trustee. 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.

Presently, Settlor is not married and has four children, Daughter, Son 1, Son 2, and Son 3. Daughter and Sons are adults and are the remainder beneficiaries of Trust.

On Date 2, Settlor, in his capacity as the trustee of Trust, with the joinder and consent of Daughter, Son 1, Son 2, and Son 3, executed Modification to modify Trust. Modification is effective on Date 3. Modification provides, in relevant part, that upon the expiration of the X-year period, Settlor’s children are granted the power to appoint an equal share of the corpus of 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.

Daughter, Son 1, Son 2, and Son 3 directed the trustee to amend and restate Trust to grant a Y-year term interest to Settlor to possess and occupy Residence, effective as of Date 3. This term is renewable with the consent of the remainder beneficiaries.

You have requested the following rulings:

1. Sections 2702(a) and 2702(a)(2) will not apply to the amendment and
   restatement of Trust, pursuant to which Daughter, Son 1, Son 2, and Son 3 will
   make a transfer of a term interest in Residence to Settlor.

2. Upon executing the amendment and restatement of Trust in which Daughter,
   Son 1, Son 2, and Son 3 grant a term interest to Settlor, and upon each renewal
   of the term interest, Daughter, Son 1, Son 2, and Son 3 will make a transfer of
   property by gift within the meaning of § 2501 to Settlor.

LAW AND ANALYSIS
PLR-103875-11 3

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

transfer of property by gift during such calendar year.

   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 § 25.2702-5. A transfer in trust meets the requirements of § 25.2702-5 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 § 25.2702-5(c). 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.
PLR-103875-11 4

    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(55) of Rev. Proc. 2011-3, 2011-1 I.R.B. 111, 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 amendment and restatement of Trust, as long as this modification and amendment and restatement, pursuant to which Daughter, Son 1, Son 2, and Son 3 will transfer a term interest in Residence 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 as well as any extensions, Daughter, Son 1,
PLR-103875-11 5

Son 2, and Son 3 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.

    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

the Code provides that it may not be used or cited as precedent.

                                       Sincerely,



                                       _________________________
                                       Leslie Finlow, Senior Technician Reviewer
                                       Branch 4
                                       Office of the Associate Chief Counsel
                                       (Passthroughs and Special Industries)

Enclosure:
Copy of letter for section 6110 purposes

cc: