Brown & Associates - Attorneys & Counselors at Law, P.L.L.C.

THE QUALIFIED PERSONAL RESIDENCE TRUST
(11/10/02)

Over the years, Congress has tinkered with the Estate and Gift Tax rules to minimize the number of taxpayers subject to them. Even so, some taxpayers still pay a significant amount of taxes at their death. This assumes, of course, that Congress doesn't permanently repeal the Estate Tax.

Most taxpayers with a taxable estate already have a sophisticated estate plan in place to minimize or eliminate estate taxes. Even so, many own a personal residence, a cabin in New Mexico, or a large retirement plan that will subject their estate to significant federal estate tax.

If you are like most taxpayers, you don't want your family to pay any more taxes than necessary. On the other hand, you're not willing to give away assets you feel you might need during your retirement years.

Until 1990, you could transfer property and assets to your family in trust while retaining use and control during a specified period. This reduced your gift taxes because of the value of this retained interest. In 1990, however, Congress amended the rules. Now the value of an interest transferred in trust to a family member which is subject to a donor-retained interest will not be reduced by the value of this retained interest for gift tax purposes. In other words, the value of the gift to your family member is 100% of it's fair market value.

The Exception to the Rule

Fortunately, Congress has provided you a way to reduce your estate tax. It is called the Qualified Personal Residence Trust or QPRT.

A QPRT holds a personal residence as its only asset. You transfer your home into the Trust and retain a term interest. The value of the gift is reduced by this retained interest based on tables published by the Department of the Treasury. If you have a contingent reversion interest in the Trust, this retained interest is even more valuable.

If you fail to survive for the entire term of your retained interest, the property is added back into your estate for tax purposes even though it technically belongs to the beneficiaries of the Trust. If you have a contingent reversion interest, however, the property doesn't pass to the beneficiaries of the QPRT. Instead, it becomes part of the residue of the Trust and may qualify for a marital deduction if your spouse is still living.

Example: Let's say you have a home worth $500,000 which you transfer to a QPRT for a ten-year period. After ten years, the QPRT allows your spouse to continue to use the property for his or her lifetime and then transfers it outright to your children. If you live for ten years after you make this gift, you will have passed your residence to your children at a reduced tax rate, removed most of its value from your estate, and will still be able to use the home as a guest of your spouse during his or her lifetime and as a guest of your children after his or her death. Essentially, you have the full use of the property just as you did before you transferred it, but without the adverse estate tax consequences.

Be Sure to Comply with the Statutory Requirements

The rules for QPRTs are complex and you must comply with every one in order for you to be able to take advantage of the savings in estate and gift tax. These rules can be summarized as follows:

The only asset you can transfer to the Trust is your personal residence or summer home.
The Trust must prohibit your Beneficiaries from transferring the home back to you or your spouse, either directly or indirectly.
The term of the retained interest cannot be shortened.
All income from the Trust during this retained term interest must be distributed to you or any other term holder at least annually.
The Trust must prohibit distribution of Trust assets to anyone other than you during this term period.
If the Trust property ceases to be used as a personal residence for any reason, the Trust may not continue to qualify for this special tax treatment.

There is one exception to this last rule. If the residence is sold or destroyed, the regulations permit you to retain the sale or insurance proceeds for a short time while you are actively seeking to acquire a new residence.

Conclusion

Under the right set of circumstances, a QPRT may be the answer to your estate planning needs and may result in significant tax savings. A QPRT is not for everyone, so if you are thinking about establishing one, be sure to consult with an estate planning professional who can advise you on its pros and cons to see if it fits with your situation.

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