- In re Ferrante, No. CC-14-1222-KiTaPa (9th Cir. B.A.P. Aug. 26, 2015).
- A qualified personal residence trust (“QPRT”) fails, and its assets revert to the grantor and become property of the estate upon the grantor’s bankruptcy, if the trust contains a prohibited “buy-back” provision. Not-for-publication memorandum.
- Procedural context:
- In 1994, the debtor created a trust as a QPRT under 26 U.S.C. § 2702 and 26 C.F.R. § 25.2702-5. He contributed his residence to the trust and made his children the trust’s beneficiaries. The debtor filed his chapter 7 petition in 2010 and received a discharge in 2012. The chapter 7 trustee filed an adversary proceeding against the debtor, the trust, and others, seeking turnover of the residence to the trustee, declaratory relief, and revocation of the discharge. The trustee filed a motion for summary judgment seeking an order revoking the trust and for surrender of the residence to the estate. The bankruptcy court granted the motion, and the debtor appealed to the B.A.P., which affirmed.
- A QPRT provides a tax savings mechanism through which a parent may transfer a residence to a child at a dramatically reduced estate and gift tax cost. The trust gave the debtor the option to buy the residence back from the trust immediately before expiration of the trust. That provision is prohibited under 26 C.F.R. § 25.2702-5(c)(9), which was added in 1997. The 1997 regulation amendment permitted a noncompliant trust (such as the debtor’s) to be modified to comply with the new regulation, but the modification had to be commenced by March 23, 1998. Because the debtor’s trust was not modified to comply with the 1997 regulation, it ceased to be a QPRT on March 24, 1997, and the regulation required distribution of its assets, including the debtor’s residence, to the debtor. The residence was thus estate property when the debtor filed his petition.
- Ralph B. Kirscher, Laura S. Taylor, and Jim D. Pappas, Bankruptcy Judges.
In re Jerry Dewaye Gaddy
Summarizing by Matthew Hale
3146 in the system
1 Being Processed