Qualified Personal Residence Trusts
A Qualified Personal Residence Trust (QPRT) is a technique whereby a taxpayer gifts his or her home to a special trust, reserving the right to live in the home for a fixed number of years. After that number of years, the children (or a trust for their benefit) will own the home. The parent may continue to live in the residence after the fixed time-frame, pursuant to a lease, and for the payment of a fair rental. The advantage of a QPRT is that it can be a technique that can leverage the gift of a house out of a taxpayer’s estate. The leverage is, in part, due to the fact that the parent/donor retains the right to live in the house for a fixed number of years. That right delays the beneficiary’s receipt of the house, and reduces the value of the gift on a present value basis. QPRTs are most effective when interest rates are high, because higher rates serve to reduce the remainder interest that is the value given to the children. However, many taxpayers have carefully evaluated the use of QPRTs because of the decline in the value of residential property.
QPRTs should be evaluated in light of the new TRA rules. The higher exclusion makes it unnecessary to consider QPRTs for many estates that would have taken advantage of this planning technique in the past. QPRTs were especially valuable to clients who had moderate wealth estates, that were subject to the estate tax, as their homes were a significant asset; they did not have estates so large that cash gifts, GRATs, dynasty trusts, and other planning techniques would have been palatable. Often, QPRTs were agreeable because clients could retain their liquid assets intact to cover living expenses. For most of these clients, at least until 2012, there may be no use for QPRTS.
In many instances, they will no longer be advisable or necessary. Or will they? If the 2013 $1 million exclusion roars back, perhaps many more taxpayers should evaluate QPRTs. The advantage to a QPRT is that it can leave the taxpayer’s liquid assets intact, and remove appreciation of the home as the residential real estate market recovers. The calculus might appropriately be its worth considering the legal and other costs of completing the QPRT as akin to an insurance policy in case the 2013 year brings bad estate tax tidings. Thus, some group of clients might consider using a QPRT today in the event that, following 2012, the estate tax rules are modified in a negative manner. This would give such taxpayers a two-year head start on running out (tolling) the QPRT plan. In other words, if a taxpayer were to complete a QPRT, structured so that the trust owning the house would last six years, this plan could be implemented now, or, perhaps the taxpayer would wait until the end of 2012. If the plan is implemented now, the taxpayer would have completed one third (two of six years) of the trust term. Since, with a QPRT, the taxpayer must outlive the trust term, why wait? However, if the plan succeeded, it would be at the expense of a more substantial capital gains tax to the heirs when the house is sold at some future date.
For a small number of wealthy clients, with substantial value in their homes, and homes so valuable that the previous exclusion levels may QPRTs impractical, re-evaluating the technique may be worthwhile.
: Taxpayers have a $15 million estate, $10 million of which consists of their valuable center city apartment. The state in which they reside has an estate tax with a low exemption amount, but no gift tax. With a $1 million gift tax exemption a QPRT was impractical. With a $5 million gift exemption, husband and wife can re-title their apartment to tenants in common and each give undivided one-half interests in the apartment to their separate QPRTs, not trigger any gift tax, shift the discounted current value of the residence out of their estates (assuming they survive their respective QPRT terms), not trigger any gift tax, remove future appreciation in the apartment from their estates, and achieve substantial future estate tax savings.