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Home > Services > Trust and Estate Planning > Sub Trusts > Qualified Personal Residence Trust - QPRT
The Qualified Personal Residence Trust (QPRT) rules prescribed under IRC Section 2702(a) provide an opportunistic exception to the IRC Chapter 14 laws (1990) abolishing most “estate freeze” techniques, which were commonly used with large estates. With proper planning, taxpayers owning high value residences can significantly reduce the estate tax liability associated with the transfer of their residences (upon decease) to their children.
Estate freeze strategies (e.g., methods to mitigate the increase of the “taxable” value of an asset) usually incorporate gifting techniques, generally to younger generation beneficiaries, with a retained interest by the giftor – such as a right to
Congress later recognized a problem with imputing heavy taxation on family residences and so provided a corresponding exception to the disallowance of a retained interest transfer being deemed as a completed gift/transfer. Under IRC Section 2702(a)(3)(A)(ii), a taxpayer’s residence or vacation home can be transferred to a QPRT with the retention of a life estate for the transferor and yet be deemed as a completed gift/transfer for tax purposes. A gift tax liability is incurred with this methodology, notwithstanding, but it would usually be considerably less than the future estate tax liability – especially if the property appreciates in value.
The grantor of a QPRT can transfer his residence (or vacation home) to the trust and name his children (or others) as the remainderman beneficiaries. Under the QPRT rules, he may retain the exclusive use of the residence for a term of years specified in the trust, which term he can choose since there is no minimum or maximum term requirement.
The terms of the QPRT would provide for a “contingent reversionary interest” that would cause the residence to lapse back to the grantor’s estate if the grantor dies before the expiration of the term-of-years period. If the grantor survives the term-of-years period, however, the transfer of his residence to the QPRT is then deemed a completed gift and thus not in his estate for tax purposes at his decease. The longer the term-of-years period the greater the value attributed to the grantor’s reversionary interest in the property, which will be completely dissolved if he survives the term-of-years and thus be removed from his taxable estate at his decease.
If the grantor survives the term-of-years, the QPRT can either terminate or the residence can remain in trust, if the trust so mandates, and be required to allow the grantor a lifetime right-to-rent of the residence, for fair market value. At the grantor’s decease, there will be no estate tax imputed on the transfer of the residence to the QPRT beneficiaries since the grantor was deemed to have made a completed gift of the residence before his decease.
Determining the value of the initial gift to QPRT for tax purposes is a function of (i) the grantor’s age, (ii) the value of the residence at the time of transfer, and (iii) the term-of-years period selected by the grantor. The grantor’s retained right to occupy the residence when in the QPRT, and the right to have it reallocated to his estate if he does not survive the term-of-years, is used to determine the value of the residence that was not part of the original gift value. Thus the initial gift amount is simply the total value of the residence minus the value of the grantor’s retained interests. Again, if the grantor survives the term-of-years period, then the grantor’s retained interest is automatically dissolved (by function of law) and thus not in his estate for tax purposes at his subsequent decease.
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