In this private letter ruling, the issue was whether the transfer of assets for fair market value between a marital trust and a nonmarital trust resulted in a taxable gift or a disposition of an income interest in qualified terminable interest property (“QTIP”). Upon the decedent’s death, the decedent’s Family Trust became irrevocable and was divided into the Marital Trust and the Exempt Trust. The decedent was survived by a spouse from a second marriage (“Spouse 2”) and two children, grandchildren and great-grandchildren from his first marriage (the children are referred to herein as “Child 1” and “Child 2”). The Marital Trust, Child 1, Child 2 and a trust for the benefit of Child 1 each owned interests in various entities. At the time of decedent’s death, Child 1 was the manager, managing-member or general partner of eight of these entities. Child 1 and Child 2 filed a petition for an accounting of the Family Trust and the Trustees of the Marital Trust filed a petition to establish the ownership interest of the Marital Trust in certain entities and to enforce Child 1’s resignation as manager. The parties ultimately entered into a settlement agreement during a court ordered mediation. The agreement required the Marital Trust to purchase at fair market value (“FMV”) the interests of Child 1 and Child 2 in certain entities and for Child 1 and Child 2 to purchase at FMV the interests of the Marital Trust in other entities. To the extent there was any difference in the aggregate FMV of the Marital Trust purchases and the Child 1 and Child 2 purchases, an equalizing payment would be made. The FMV of the interests would be determined by 2 commercial appraisers.
Under IRC Section 2512(b), the amount by which the value of property exceeds the amount received as consideration is deemed to be a gift. Accordingly, when property is transferred for adequate and full consideration in money or money’s worth no gift occurs. The IRS ruled that the transactions between the Marital Trust and Child 1 and Child 2 to resolve discord between the decedent’s surviving spouse and her stepchildren were the result of a bona fide adversarial proceeding and arms-length negotiations such that the FMV exchange would be made for adequate and full consideration in money or money’s worth and not subject to gift tax.
Under IRC Section 2519(a), a disposition of all or part of a qualifying income interest for life in QTIP property results in a deemed transfer of the value of the residuary interest in such property which is subject to gift tax. The ruling request asked whether the transfers pursuant to the agreement would result in a disposition of a qualifying income interest under IRC Section 2519. The IRS held that after the transfers, Spouse 2 would continue to possess a qualifying income interest for life in the assets of the Marital Trust, and, therefore, the transfers pursuant to the agreement would not result in a disposition of a qualifying income interest.