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By Deborah M. Beers, Esq.
Buchanan Ingersoll & Rooney PC, Washington, DC
The IRS, in PLR 201131006, ruled that the modification of a qualified personal residence trust (QPRT) to provide that, upon the expiration of the QPRT term, the settlor's children are granted the power to direct the trustee to amend and restate the terms of the QPRT so as to provide a term interest to the settlor as a gift by the settlor's children, will not transgress §§2701 and 2702(a)(1) and (2), and will constitute a gift of the term interest from the children at the expiration of the QPRT term.
The upshot of the technique creatively employed in this PLR is the avoidance of the payment of rent by the settlor to her children, which often presents itself as an unpleasant reality (and sometimes as a surprise) at the end of the QPRT term.
Under the facts of the PLR, the settlor created a QPRT for the benefit of herself and her spouse (who died during the QPRT term) for a period of years, after which the QPRT would continue in effect for the benefit of her four adult children.
Sometime thereafter, the settlor, in her capacity as sole trustee of the QPRT, with the joinder and consent of her four children, executed a modification to the QPRT, to be effective on a specified date. The modification provided that, upon the expiration of the QPRT term, settlor's children are granted the power to appoint an equal share of the corpus of the QPRT to themselves, or by unanimous agreement, they may direct the trustee to amend and restate the terms of the QPRT so as to provide a term interest to the settlor, her spouse, or both, as a gift by the children.
The settlor's children represented that they intend to amend and restate the QPRT to grant a "Y-year" term interest to the settlor to possess and occupy the residence on or before the date the modification is effective. This term will be renewable by written amendment to the agreement acknowledged by the settlor.
On these facts, the IRS ruled as follows:
1. Section 2702(a)(1) and (2) (which treat the transfer of a term interest to a member of the transferor's family as a transfer of the entire property, absent an applicable exception) will not apply to the modification and proposed amendment and restatement of the QPRT.
Typically, a QPRT is established when a donor transfers a residence into a trust and retains the right to reside therein for the term of the trust, with the residence passing to the donor's chosen beneficiaries at the end of the trust term. In PLR 201131006, the settlor transferred the residence into a QPRT and created a remainder interest for the benefit of her children, but apparently changed her mind about paying rent to those children after the expiration of the QPRT term. Therefore, with the children's acquiescence, the QPRT was modified to allow the mother to continue to reside in the residence rent-free. Because this is an atypical circumstance, the IRS chose to rule in spite of its general protocol to not issue rulings on whether a trust with one term holder satisfies the requirements of a QPRT.
Because the trust described in the PLR met the requirements of a QPRT, which is an exception to the general valuation provisions of §2702(a)(1) and (2), the transfer to the mother of one or more term interests will be valued, for gift tax purposes, solely by reference to the actuarial tables under §7520. Without classification as a QPRT, the transfer of the term interest would be valued, for gift tax purposes, by reference to the value of the entire property transferred, not just the term interest.
2. Upon executing the amendment and restatement of the QPRT in which the children grant a term interest to the settlor and upon each renewal of the term interest, the children will make a transfer of property by gift to the settlor.
Although the ruling does not specifically say so, this gift will presumably be complete because each child will fail to exercise his or her general power of appointment over the QPRT corpus upon the expiration of the QPRT term.
Observations: Note that, in PLRs 200814011 and 200816025, two mothers created respective 10-year and eight-year QPRTs for the benefit of their children. Under the facts of those PLRs, the parties did not amend the QPRTs in advance of their termination, but waited until the terminations of the respective 10 and eight year terms of the original QPRTs to make a gift of a successive term interest to the mothers. The IRS ruled in each case that the second trust would qualify as a QPRT.
Note also that, in those rulings, as in PLR 201131006, the IRS specifically refused to rule as to whether the residence would be includible in the mother's gross estate under §2036. Thus, while the unusual facts generated a positive result regarding the QPRT determination, the IRS left open the possibility that this unique plan could have negative estate tax consequences for the mother. The determination of whether that result would obtain probably would depend on whether there was a prearranged understanding that the mother would be entitled to occupy the residence rent free after the expiration of the original QPRT term. This is probably why, in each case, that right was not included in the original QPRT indenture, but was added as a modification in one case and as a totally new trust created after the expiration of the original QPRT in the others.
For more information, in the Tax Management Portfolios, see Blattmachr, Slade, and Zeydel, 836 T.M., Partial Interests — GRATs, GRUTs, QPRTs (Section 2702), and in Tax Practice Series, see ¶6350, Estate Planning.
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