Qualified Personal Residence Trusts
A qualified personal residence trust (QPRT, pronounced Q-Pert) is an estate planning vehicle to transfer one or two personal residences into irrevocable trusts for a term of years (or the lifetime of the grantor) while retaining the right to use the homes during the term of the trusts. A QPRT is essentially a grantor retained interest trust (GRIT) funded with a personal residence (sometimes referred to a Personal Residence GRIT). A single grantor may have only two QPRTs, and each may only hold one residence, one of which must be the grantor's principal residence (or the grantor's interest in the residence). Unlike the typical GRIT, family members are appropriate remainder beneficiaries of a QPRT. This has the potential of moving a significant portion of the present value of a residence plus its future appreciation from the grantor's estate, while still providing the grantor the right to use the property for the trust term.
The definition of a personal residence includes a house, apartment, condominium, mobile home, boat, or similar property, and all structures or other property appurtenant to the home. The applicable regulations permit a portion of the residence to be used as an office. If the residence placed in trust is a vacation home, the grantor must occupy the residence for the greater of fourteen days or ten percent of the number of days in a given year that the vacation home is rented at fair market value. Tangible personal property located in a residence may not be placed in a QPRT. A QPRT is permitted to hold only a very limited amount of cash.
As with a GRAT or GRUT, a taxable gift to the remainder beneficiaries occurs at the time the trust is created. Since the remainderman will not have beneficial enjoyment of the trust assets until the end of the trust term, the gift is of a future interest in property and does not qualify for the annual gift tax exclusion. Also as with a GRAT or GRUT, the value of the taxable transfer is discounted for the value of the retained interest using IRS tables considering the term of the trust.
Assume that Grantor transfers his principal residence with a current market value of $1 million into a QPRT, retaining the right to use the property for 15 years. Assuming a 5.6% discount rate from the IRS tables, the value of the taxable gift would be approximately $415,000. In this computation, the present value of the entire property, the value of the depreciable portion of the property (buildings and improvements, but not land value), the estimated life of the property, and the salvage value of the depreciable property must be considered.
The value of the gift must be established by an independent appraisal. While it is simpler to fund a QPRT with a residence without a mortgage, property subject to indebtedness may be used. The remaining balance of the mortgage must be subtracted from the current appraised value of the property in computing the amount of the gift. As the grantor makes future mortgage payments, a portion of each principal payment is also treated as a gift to the remainderman. This may require filing gift tax returns for each year in which payments are made. Since a QPRT is considered a "grantor trust," the grantor is entitled to an income tax deduction for interest paid on the mortgage and real estate taxes.
If the grantor fails to survive the term of the trust, the full fair market value of the property at the grantor's date of death is included in his gross estate. If the grantor survives the term of the trust, he must either move out or rent the property from the remainderman at an appraised fair rental value. The rental agreement must be written; it should also be drafted and administered on an arm's-length basis. To remain in the property rent-free will cause the grantor to have a retained interest sufficient to bring the entire value of the property back into his gross estate at death. In addition, the rental agreement should be negotiated at the end of the trust term, rather than included as part of the trust itself.
One additional issue with a QPRT is basis of the property in the hands of the remainderman. At the time the residence is place in trust, the grantor's basis is split between the grantor and the remainderman in the same ratio as the value of the retained interest and the gift. If the IRS tables yielded a gift of forty percent of the present value of the home, then only forty percent of the basis would pass to the remainderman if the grantor survives the term of the trust. There may be an income tax trade-off, then, if the remainderman intends to sell the property at the end of the trust term.
Passing one or two personal residences to beneficiaries through QPRTs removes those assets from the grantor's probate estate which should reduce costs of administering the grantor's estate, and provides a measure of confidentiality since a trust is generally not a public document as is a will. A QPRT may avoid ancillary probate if the grantor owns property located in more than one state
QPRTs are not for every estate plan. They may be a good choice for transferring personal homes within a family. They are but another tool to fill a specified need. QPRTs should be drafted only by well qualified estate planning attorneys.
©2008 Ronnie C. McClure, PhD, CPA