Section 2702 provides that all retained interests in trusts that are not “qualified interests” are valued at zero. The amount of any gift is then determined by subtracting from the value of the property the value of the retained interest. The valuation of retained interests in trust under Section 2702, specifically does not apply to incomplete gifts (determine without regard to whether there is consideration), personal residence trust, and charitable lead trusts. This occurs if the only interest other than the remainder or a qualified annuity or unitrust interest is the charitable lead interest.
Section 2702 also does not apply to assignment of remainder interests in trusts if the only retained interest is distribution of income in the sole discretion of an independent trustee, as defined in Code section 674(c), and certain property settlement agreements.
The following definitions apply under Section 2702:
- A member of the family includes the spouse of an individual, the ancestor, lineal descendant, sibling of an individual, the individual’s spouse, the spouse of any such person, or the brother or sister of the individual.
- An applicable family member includes the spouse of an individual, an ancestor of the individual or the individual’s spouse, or the spouse of any such person.
- A transfer in trust includes a transfer to a new trust or an interest in an existing trust. But, it is not a transfer resulting from exercise of a special power of appointment; exercise, release, or lapse of a power of appointment that would not constitute a taxable gift (e.g., lapse of “Crummey” power which does not exceed “5 or 5” limitation); or a disclaimer.
- A retained interest is one held by the same individual both before and after the transfer to the trust, or a carved-out term interest.
