SC Lawyer, July 2003, #7. Bailing out of a qualified personal residence trust - is there a parachute?.

AuthorBy J. Munford Scott Jr.

South Carolina Lawyer

2003.

SC Lawyer, July 2003, #7.

Bailing out of a qualified personal residence trust - is there a parachute?

South Carolina LawyerJuly 2003Bailing out of a qualified personal residence trust - is there a parachute?By J. Munford Scott Jr.Under current Internal Revenue Code provisions and IRS regulations, substantial estate tax savings are possible through the use of Qualified Personal Residence Trusts (QRPT). These trusts involve the transfer of a residence to a trust, with the retention of the right to use the residence for a specified term of years. Typically, trust provisions permit the transferor's (Grantor's) spouse to remain in the residence for life after the end of the initial fixed term used by the Grantor. After that, however, ownership passes to named beneficiaries, usually the couple's children. If the Grantor wishes to live in the residence after the end of the trust term and there is no surviving spouse, an arms length rental agreement can be worked out.

Through this devise, the residence will be removed from the Grantor's estate and will eventually pass to the Grantor's heirs at a deep discount from existing values for gift tax purposes. In addition, future appreciation will be out of the Grantor's estate. Unlike grantor retained annuity trusts (GRATS) and grantor retained unitrusts (GRUTS), the retained interests of which are covered in § 2702, with a QPRT the Grantor's estate is not increased by annuity payments. The gift is determined by subtracting the value of the Grantor's retained interest from the value of the residence. There is no federal gift tax payable on creation of the QPRT where the Grantor's unified credit exemption equivalent can be used. Savings increase for those willing to pay a gift tax since, under § 2035(c), the gift tax itself will be out of the Grantor's gross estate if the Grantor lives at least three years after the transfer. Otherwise, the residence is brought back into the Grantor's gross estate under § 2036, since the Grantors retained right to remain in the residence will be in existence at his death. The Grantor, however, is no worse off for having created the QPRT since any unified credit used in making the transfers to the trust is restored under the provisions of I.R.C. § 2001(b).

Under Reg. § 25.2702-5, an individual can create up to two Qualified Personal Residence Trusts. A QPRT can be created using a vacation home or secondary residence under § 280A(d)(1) a principal residence under § 1034 or an undivided fractional interest in either. The Grantor must reserve the right to remain in the home for a specified term of years. Any number of years may be used, unlike the case in former §...

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