Sale of residence before end of term may produce extraordinary benefits for QPRT beneficiaries.

• Author: Taylor, Rick J.
• Position: Qualified personal residence trust

One of the hottest planning techniques available for enhancing overall family wealth involves the use of a qualified personal residence trust (QPRT). Because the special valuation rules of Sec. 2702 do not apply to the transfer of an interest in a QPRT, the technique can be used to transfer the remainder interest in a residence to junior family members at a discounted gift tax value. The primary disadvantage of using a QPRT is that the trust's remainderpersons do not get a step-up in basis for the home when the term interest holders (e.g., parents) die. However, there may be a way for certain clients to get the best of both worlds - the full advantage of a QPRT's transfer tax savings potential and a step-up in the home's basis - by having the trust sell the home back to the transferor shortly before the transferor's term interest expires.

Exception from

Chapter 14

valuation rules

Generally, under Chapter 14 of the Code, when a transfer is made in trust, any retained interest is valued at zero for purposes of determining the value of the resulting gift (Sec. 2702(a)(2)(A)). This rule does not apply if the retained interest is a "qualified interest"; nor does it apply if the only property held in the trust is a personal residence that is to be used as a personal residence by a person holding a term interest in the trust (usually, the transferor) (Sec. 2702(a)(3)(A)(ii)). In the case of a QPRT, the amount of the gift is calculated under the more favorable valuation tables that applied to grantor retained income trusts before the enactment of the Chapter 14 rules. Moreover, if the transferor survives until his term interest expires, the value of the residence will not be included in his estate. Thus, a QPRT can generate significant transfer tax savings.

Buy home back from trust

From an income tax standpoint, the QPRT loses some of its attractiveness if the remainderpersons intend to sell the home once they take possession (assuming the transferor survives until his term interest expires). Reason: Since the remainderpersons will have received their remainder interest by gift, their basis in the home generally will not be stepped up to its fair market value (FMV) on the date of the transfer. In fact, their basis may be limited to a carryover basis. Although Sec. 1015 provides that for gain purposes, the donee's basis of property acquired by gift is the donor's adjusted basis plus the gift tax attributable to the appreciation of the property to...