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Estate Tax Summary

Special Use Valuation of Mixed Use Property Must Derive From Multiple Factor Method
A decedent's estate included a 272-acre parcel of real estate that consisted of approximately 127 acres of pastureland and 145 acres of timberland. Although the lessee of the parcel used part of it as a farm and for pasturelands, the lessee had no responsibility for maintaining the timberland and only the lessor (decedent) had the right to sell timber selectively harvested from the parcel.
For estate tax purposes, the decedent's executor elected special use valuation for the parcel. In addition, the executor elected, under section 2032A(e)(13), not to treat any trees growing on "qualified woodlands" as a crop. In computing the special use valuation, the executor relied exclusively on assessed land values in the state, which provides a differential or use value assessment for farmland and does not treat an interest in timber as an interest in the real estate on which it stands. In making the election, the executor cited as comparable property only one other property in the area, which also consisted of both pastureland and woodland and which was sold shortly after the decedent's death to a lumber company.
The Service has ruled in technical advice that in valuing the parcel, the executor must segment the pastureland and woodland, assign appropriate values to each, and then arrive at a combined special use valuation for the entire parcel. In addition, as required by Rev. Rul. 89-30, 1989-1 C.B. 274, which applies to situations in which no substantially comparable property has been cited, the executor must use all five prongs of the multiple factor method set forth in section 2032A(8).
Merely using local real estate property tax assessment values is not sufficient, the Service said, because those values apply only to the land and not to the growing timber. Thus, an appraisal value of standing timber on the property must be considered and a comparison must be made of contract values for similar timber sales in the area. In addition, the executor must examine the history of the parcel, in terms of selected or total harvesting, and the income derived from it.
Full Text: LTR9328004

Trust Funded With Unproductive Property Not Eligible For QTIP Treatment.
The Service has ruled in technical advice that a trust for the benefit of a surviving spouse is not qualified terminable interest property (QTIP) under section 2056(b)(7) because the spouse is not entitled to all of the income from the trust.
A woman died in 1993 survived by three daughters. The primary assets in the mother's estate were closely held business interests comprising timberland and the timber on it. The mother left a pour- over will and revocable trust agreement. The trust agreement provided for the distribution of the residue of the trust in equal shares to the three daughters, after all estate taxes were paid and after final audit. The trust further provided for deferral of federal estate taxes under section 6166 if the residuary beneficiaries agreed. The mother's estate elected to pay the estate tax over the 15-year period provided for in section 6166.
Each daughter's one-third share of the residuary trust consisted of a right to receive timberland and the timber on it. The trustee could sell timber occasionally as necessary to pay estate tax and interest under section 6166 and need not resort to selling the underlying timberland.
One of the daughters died in 1994 survived by her husband. The daughter left a pour-over will and revocable trust agreement providing for the distribution to a "marital QTIP trust" of the property the daughter received or was entitled to receive as a vested remainder beneficiary of the trust created by her mother. During his lifetime, the husband was to receive all net income from the trust at least annually. The trust provided that the husband could direct the trustee to convert any non-income-producing property to income- producing property, but not "real property used for the production of timber."
At the time of the daughter's death, the trustee of the mother's residuary trust had not distributed any income or principal to the daughter. The daughter's estate elected QTIP treatment for the marital trust, reporting its value as the value at the daughter's date of death of her one-third interest in the residuary trust created by her mother.
The Service determined that the husband's interest did not qualify for QTIP treatment under section 2056(b)(7)(B)(ii) because, under reg. sections 20.2056(b)-5(f)(4) and (5), the husband wasn't entitled to all of the income from the trust. Although the husband was to receive all of the net income annually, the Service concluded that the trust was funded substantially with unproductive property and that the husband could not compel the trustee to convert the trust assets to productive property.
The Service noted that because the mother's estate made the installment election, the daughter's remainder interest will be distributed after termination of the section 6166 period -- 15 years after the due date for payment of the estate tax for the mother's estate without the election. And the property the daughter was to receive from her mother's estate is the only asset in the trust for the daughter's husband. So, at the daughter's death, the trust received a vested remainder in one-third of the mother's residuary trust, to be paid approximately 14 years after the daughter's death.
Full Text: LTR 9717005

Trust Will Retain Exempt Status After Partition and Modifications.
The IRS has ruled that the proposed partition and modification of a trust, which is exempt from the generation-skipping transfer tax, will not cause the partitioned trust to lose its exempt status under the generation-skipping transfer tax.
A grandparent created an irrevocable trust in 1957, which, in turn, created four trusts, one of which benefited the grandparent's son. On the son's death in 1978, he appointed his interest in his trust to the "Article VI Trust," benefiting his son (grandson). The grandson now proposes to partition the Article VI Trust into two trusts for the purpose of improving the coordination between the 1957 irrevocable trust and the Article VI Trust. He also proposes four modifications to the terms of the latter trust that affect the trustees' identity and powers.
The Service concluded that no additions have been made to either trust since September 1985, that the partitioned Article VI trusts will have terms identical to those of the initial trust, and that the partition wouldn't alter the quality, value, or timing of interests under the initial Article VI Trust. Additionally, the partition would not confer any additional powers, the Service said, and all of the proposed modifications would affect only the trust's administrative provisions.
Full Text: LTR 9728043

Proposed Trust is Qualified Personal Residence Trust.
The Service has ruled that a proposed trust will be a qualified personal residence trust, and that the property placed in the trust will not be includable in the grantor's gross estate if he survives the term of the trust. The terms of the proposed trust provide that the grantor will be entitled to the use and occupancy of the residence to be contributed to the trust for a 20-year period. If the grantor and his spouse survive that period, the property will pass in further trust for the benefit of his spouse and children. The Service concluded that if the grantor survives the 20-year term of the proposed residence trust and pays the fair market value rental for any periods during which his children own the property and he uses or possesses the property, the property will not be includable in his gross estate under section 2036(a).
Full Text: LTR 9735035

Like-Kind Exchange of Foundation Property is Not Self Dealing
The Service has ruled that a proposed like-kind exchange and partition of a foundation's undivided interest in timberland will not be acts of self dealing under section 1491.
A bequeathed a percentage interest in R timberland to M in trust for the benefit of a private foundation. Other pieces of timberland -- an interest in R timberland, a tract in S, and a tract in T -- are owned by members of O's family and by family trusts for their benefit. Unrelated buyers want to acquire the S timberland property. M proposes to complete a like-kind exchange so that a 100 percent fee simple interest in the S timberland property held by the family trusts will be exchanged for an interest of equivalent value in the foundation's percentage interest in the R timberland property. M will also receive a 100 percent fee simple interest in the T property, an interest in the R property, and cash. After the exchange, M will complete the sale of the S property and will distribute the proceeds to the foundation. The Service concluded that the proposed transactions will not be acts of self dealing, noting that the interests in property received by the foundation from the like-kind exchange will be at least as liquid as the property the foundation will give up.
Full Text: LTR 9739033

Trust Will Be Qualified Personal Residence Trust
The Service has ruled that a trust to which an individual will transfer a parcel of property holding a single family dwelling is a qualified personal residence trust. The dwelling has been used by the individual as a personal residence for more than 25 years. After the property has been transferred to the trust, the dwelling will be held for the exclusive use of the individual. All trust income must be distributed annually to the individual. The IRS ruled that the proposed trust will be a qualified personal residence trust within the meaning of reg. section 25.2702- 5(c).
Full Text: LTR 9817004

Trust Will Be Qualified Personal Residence TrustÊ
The Service has ruled that a trust to which an individual will transfer a parcel of property holding a residence is a qualified personal residence trust. The dwelling has been used by the individual as a personal residence. After the property has been transferred to the trust, the dwelling will be held for the exclusive use of the individual. All trust income must be distributed annually to the individual.
The IRS ruled that the proposed trust will be a qualified personal residence trust within the meaning of reg. section 25.2702- 5(c).
Full Text: LTR 9827037

Exercise of Option Will Not Be Self-DealingÊ
The Service has ruled that the exercise of an option to purchase assets of a private foundation will not be an act of self- dealing under section 4941. A father established a private foundation consisting of timber properties that he held jointly with his ex-wife as tenants in common. His son and daughter sit on the foundation's board of directors. The father died and the foundation is the remaining beneficiary of his estate. A holding company, which has been a substantial contributor to the foundation, wishes to exercise its option to purchase the father's interest in the timber properties from the foundation. When the holding company acquires the father's interest in the property, it will enter into an arrangement with the ex-wife to exchange pieces of their undivided one-half interests so that each will become the sole owner of an identifiable portion of the acreage. The Service ruled that the exercise of the option won't be an act of self-dealing.
Full Text: LTR 9930048