In qualified personal residence trust (QPRT), you create an irrevocable trust to hold all or a portion of a principal residence. You direct the trustee to pay you the income from the trust for a specified number of years and/or allow you possession of the trust’s property. When your interest terminates at the end of the years you’ve selected, the property in the trust is distributed to family members or the other individuals you have chosen. In some cases, the trust continues for their benefit. If you die during the term of the QPRT, the entire value of the property in the trust must be included in your estate. Conversely, if you outlive the term of the trust, then the remaining assets are excluded from your estate. So, the QPRT can serve as a viable estate tax reduction technique in times when residential real estate appreciates in value.

When you put cash or assets into the trust, you made what is called a “future interest” gift. The value of that gift is the excess of the value of the property you transferred over the value of the interest you kept. The value of your retained interest is found by multiplying the principal by the present value of an annuity factor for the number of years the trust will run.

The longer term you specify the larger the value of the interest you have retained–and the lower the value of the gift you have made. Theoretically, if the term you select is long enough, the value of your retained interest approaches actuarially 100 percent. This essentially eliminates any meaningful gift tax liability.

The regulations under §2702 allow two different kinds of trusts to hold personal residences, a “personal residence trust” (PRT) and a “qualified personal residence trust” (QPRT). A PRT is very limited and inflexible, because it must not hold any assets other than the residence and must not allow the sale of the residence. A QPRT can hold limited amounts of cash for expenses or improvements to the residence, and can allow the residence to be sold (but not to the grantor or the grantor’s spouse). However, if the residence is sold, or if the QPRT ceases to qualify as a QPRT for any other reason, either all of the trust property must be returned to the grantor or the QPRT must begin paying a “qualified annuity” to the grantor (much like a grantor-retained annuity trust, or GRAT).

Podcasts