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Letter Ruling 9817004, January 6, 1998

Uniform Issue List Information:
UIL No. 2702.02-02
Special valuation rules for transfers in trust
- Personal residence in trust

Code Sec. 2702

This is in response to your letter dated September 25, 1997, and prior correspondence in which you requested a ruling concerning a qualified personal residence trust.

Taxpayer owns fee simple title to several acres of rolling, wooded land (Property) located in Community. It is represented that Property is used exclusively as a personal residence by taxpayer and has been so used for over 25 years. No individual other than taxpayer has the right to use or occupy Property and no business activity is conducted on Property.

Property consists of two parcels on the local tax map and is assessed as two separate parcels for property tax purposes.

Parcel 1 of Property is improved by a large single family dwelling, a detached garage, a hot tub and changing building, a pool and pool pumphouse, a gazebo, a camping house, and a storage and equipment building. Parcel 1 is comparable in size to adjoining and nearby properties used for residential purposes. Taxpayer proposes to transfer Parcel 1, with improvements, to a Qualified Personal Residence Trust (QPRT).

During the term of Trust, Parcel 1 will be held by the trustee for the exclusive personal use of Taxpayer. All the income of Trust must be distributed to Taxpayer at least annually. The trust document prohibits distribution of corpus to anyone other than Taxpayer. In addition, Taxpayer is prohibited from directly or indirectly reacquiring Parcel 1.

Other than Parcel 1, Trust will hold no assets other than amounts permitted under §25.2702-5(c)(5) . Trust provides that Taxpayer's interest in Trust may not be commuted.

The Trust will terminate at the earliest of twelve years from the date it is established, the date of Taxpayer's death, or the date Trust ceases to be a QPRT.

Trust will cease to be a QPRT on the date Parcel 1 is no longer used or held for use as the personal residence of Taxpayer, or Trust holds property other than one personal residence of Taxpayer and the amounts of cash and insurance permitted by §25.2702-5(c)(5) .

If Trust ceases to be a QPRT, Trust provides that within thirty days after the cessation date, the trustee must convert Trust to a qualified annuity trust. Trust must function as a qualified annuity trust from the conversion date until the termination of Trust as specified in §25.2702-5(c)(8) (ii).

If Trust terminates at the end of the twelve year term, Trust assets will be distributed to, or for the benefit of, Taxpayer's children, or their descendants. If Taxpayer dies before the term expires, the trustee will distribute all of the assets of Trust to Taxpayer's estate.

Section 2702(a)(1) of the Internal Revenue Code 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)(3)(A)(ii) provides that §2702(a) shall not apply to any 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) 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) . Section 25.2702-5(b)(1) provides that a personal residence trust is a trust the governing instrument of which prohibits the trust from holding any asset other than one residence to be used as the personal residence of the term holder. 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)(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). The fact that a residence is subject to a mortgage does not affect its status as a personal residence. The term personal residence does not include any personal property (e.g., household furnishings).

You have requested rulings that Parcel 1 qualifies as a personal residence under §2702(a)(3)(A)(ii) and that the trust meets the requirements of a qualified personal residence trust under §25.2702-5(c) .

In this case, Parcel 1 has been used exclusively as a residence for more than 25 years. Further, Parcel 1 is comparable in size to other adjoining and nearby residential properties. Based on the facts submitted and the representations made, we conclude that Parcel 1, including the personal residence and appurtenant structures, that Taxpayer proposes to transfer to Trust, satisfies the requirements of §25.2702-5(c)(2) . In addition, we conclude that Trust will be a qualified personal residence trust within the meaning of §25.2702-5(c) .

A copy of this letter should be attached to any gift, estate or generation-skipping transfer tax returns that you may file relating to these matters. No opinion is expressed regarding the tax treatment of these transactions under any other provision of the Code or regulations.

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

Sincerely yours, Assistant Chief Counsel (Passthroughs and Special Industries), Katherine A. Mellody, Assistant to the Chief, Branch 4.