A QPRT is an irrevocable trust holding a personal residence, where the grantor retains the right to use and occupy the residence for a fixed period of time, (income interest), and the principal remaining at the end of the trust term passes to the remainderman, (a non-charity beneficiary). QPRT may also hold cash for certain purposes. A taxpayer may create a QPRT for a primary and one other residence for a maximum of two.
The gift is calculated at the outset, when the trust is setup. The gift is the value of the future interest to the remainderman. There is potential for significant gift tax and estate tax savings because the taxable gift is calculated using the time value of money. The estate is effectively frozen, and the appreciation of the asset passes to the beneficiaries, escaping gift and estate tax.
The goal is for the trust term to be long enough to give a low gift tax value, and short enough that the grantor will outlive it. If the grantor dies before the trust term, then the assets are included in the grantor’s estate at their values as of her date of death.
7520 interest rate 6%, Grantor is age 75, 7 year trust term, 50% estate tax rate
Fair market value of residence at inception = $1,000,000
Present value of retained interest is .334943 * 1,000,000 = 334,943
Growth of value in residence is 4% per year, or $1,315,932 after 7 years
Value of property at gift $ 1,000,000
Less: Value of income interest retained (334,943)
Value of future interest gift (to remainderman) $ 665,057
FMV at end of year 7 $ 1,315,932
Less: Gift value at year 1 ( 665,057)
* Estate tax rate * 50%
Estate tax savings $ 325,438
AND probate costs are avoided because property passes outside of probate.
Some important points in planning a QPRT:
Get appraisal of residence placing in trust
A written lease for term after lease if grantor will remain
Lease at fair market value if grantor will remain
Consider discussing wishes of remainderman in property – may desire side agreement to make clear intent
Trustee should be other than grantor or grantor’s spouse
Life insurance (received estate tax free) on grantor’s life to provide estate liquidity to pay estate tax
Considerations for property placing in QPRT:
Mortgage on premises
Improvements made to premises additional gifts (compliance returns required)
Sale of residence before trust term expires
Tax considerations of QPRT:
Grantor trust – income / expense items flow to grantor (property taxes)
Exclusion on sale of home available if meet tests
Gift, so carry over basis upon sale by remaindermen
Gift splitting by non-grantor spouse lost if grantor does not survive trust term
QPRT after the trust term:
Trust must state grantor (or spouse) may not repurchase residence
Grantor may lease residence from remaindermen at fair market rent
Want “arm’s length transaction”
No string to pull back to grantor’s estate
Letter from broker to support rent amount
Local newpaper rental advertisements could support rent amount
Rent adjusted downward if grantor pays property taxes, etc.
Deed and transfer documents to transfer title to remaindermen
Insurance in name of remaindermen
Disadvantages of QPRT:
Transaction costs (appraiser, legal, title costs)
Lost opportunity cost of large gifts during lifetime of grantor
Consider state issue – Florida homestead exemption lost for out of state trusts as owner
Causes considerable increase in property taxes
Control / family issues
Appreciation may be less than think, consider current market and length of trust term.