QPRTs Help Take Advantage of Gift-Tax Window; Provide Opportunity to Retain Ownership of Assets– October 17, 2012

With an estate and gift tax exemption of just over $5 million due to expire at the end of 2012, high-net-worth individuals are looking to leverage the opportunity with creative asset transfer strategies. The Qualified Personal Residence Trust (QPRT) is a tool individuals should consider, due to its ability to:

1. reduce estate tax, and
2. allow individuals — especially those who may not want to part with their liquid assets just yet — the uncommon opportunity of gifting of a home, while retaining possession and use for an extended period of time.

How It Works
A QPRT is an irrevocable grantor trust created by an individual. While a QPRT allows an individual to retain the use of his or her home and take advantage of the exemption, a QPRT is truly created for the benefit of future beneficiaries. The grantor transfers a primary or secondary residence to the trust and retains the right to use the residence for a number of years, the term, as determined by the grantor. At the end of the term, the residence will pass to the named beneficiary.

The Tax Benefit
In effect, the retained right to use the property reduces the current value of the gift. For example, at age 60, an individual transfers to a QPRT a residence with a fair market value of $1 million, with a term of 10 years, and a Federal rate of 1%. The value of the gift would be $772,990. The future value of the residence in 20 years (approximate life expectancy for 60 year-old) at 3% annual growth would equal $1,806,111; and the potential estate tax savings at 50% estate tax rate would equal $516,560.

So What’s The Rub
Following are a few of the important issues that someone considering a QPRT transaction must consider:

1. The grantor must outlive the initial trust term, otherwise the value of the property will revert back to the estate. This creates a dilemma, retaining as much of a right to use the residence as possible, while at the same time insuring that it reasonable to outlive the term of the trust.

2. The grantor cannot buy back the property from the trust.

3. The grantor is not precluded from using the residential property once the trust term expires; however, the grantor will be required to pay a fair market value rent to the beneficiaries.

Other important Considerations

1. QPRTs may make the most sense for properties in markets where housing values are still depreciated but are likely to rebound in the future.

2. QPRTs work best with properties that do not have mortgages, as a bank may call a mortgage if property is transferred, future mortgage payments may result in future gifts, and termination of the QPRT with a mortgage can result in complicated part sale/part gift.

3. During the term of the trust, all items of income and deductions are reported by the grantor.

4. The trust can sell the property to an unrelated third party and hold the proceeds of sale in a separate account, and, if qualified and sold during the term of the trust, benefit from the capital gain exclusion.

5. The grantor’s beneficiaries will receive a basis in the property equal to the grantor’s basis in the property.

6. A gift tax return will be required no matter how small the remainder is, because the gift will not qualify for the annual exclusion.

7. Furnishings and other personal property cannot be included in the trust.

The decision to create a QPRT requires balancing the potential estate tax savings against the consequences of relinquishing ownership to the next generation, and the strategy should be considered in combination with a comprehensive estate and financial plan. Nevertheless, when appropriate, a QPRT can be an extremely effective tool in transferring wealth to the next generation estate tax free.

For more information, contact Chris Madison at cmadison@cohencpa.com.


This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.