Final QPRT regulations (IRS regulations on qualified personal residence trusts) (Brief Article)

• Author: Capassakis, Evelyn M.

In late December 1997, the IRS released final regulations on qualified personal residence trusts (QPRTs).

Prop. Regs. 25.2702-5 (issued in April 1996) caused a flurry of concern among estate planners. Prop. Regs. Sec. 25.2702-5(c)(9) had provided that a grantor could no longer purchase a residence from a trust (or cause it to be purchased) in such a way that would avoid the recognition of gain on the purchase. Prior to that time, it was common practice for the grantor to repurchase the residence from the trust, thereby enabling him to continue to live in the residence. In addition, any gain on its sale would be taxed to the grantor; if not sold prior to the grantor's death, the residence would receive a stepped-up basis to date-of-death value.

The final regulations now confirm the requirement that the governing instrument prohibit trustees from selling or transferring the residence to the grantor, the grantor's spouse, or an entity controlled by the grantor or the grantor's spouse, during the trust's retained term, as well as at any time after the original duration of the term interest during which the trust is a grantor trust.

The preamble to the regulations notes that the grantor may lease the residence after the termination of the retained term by paying adequate consideration, without concern that it will be included in the grantor's estate under Sec. 2036. The preamble goes on to note, however, that if the property is leased...