The right fit? Taking a closer look at QPRTs.

• Author: Caplan, Robert M.
• Position: Estate planning

Qualified personal residence trusts are popular estate planning techniques that can provide tax and non-lax benefits to certain clients. However, before entering into a QPRT, clients need to know the advantages and disadvantages to determine whether it's right for them.

What is a QPRT?

A QPRT is a special kind of grantor trust created for a certain number of years. The taxpayer gifts a residence, which can be either a principal residence or vacation home, to the trust. The gift is valued at the discounted current value of the residence looking ahead to the termination of the trust under the tables in IRC Sec. 7520. The longer the period of the trust, the greater the discount and smaller the gift.

During the term of the QPRT, grantors retain rent-free possession and enjoyment of the residence and pay all operating expenses as they did before the QPRT was established. All deductible expenses show on the grantor's individual income tax return and no trust return is required

If the grantor docs not survive the term of the trust, the transaction is collapsed, the residence fair market value is included in the decedent's estate and the transaction is treated as though the grantor never established the QPRT Thus, grantors should choose the longest term that they are likely to survive.

Who Should Have a QPRT?

Ideally, a taxpayer with a taxable estate should utilize the QPRT. In 2016 this applies to individual taxpayers with an estate in excess of $5,450,000. The QPRT is primarily an estate freeze technique and works best when the overall taxable estate can be reduced, saving a 40 percent estate tax. However, the trade-off if a QPRT is successful (the grantor has survived the length of the QPRT) is that (here is no step-up in basis at death (Sec. 1014) and, if the property is sold, there could be considerable capital gains, which could be taxed as high as 33 percent for California taxpayers in the highest tax bracket.

The QPRT works best for taxpayers who have children, are likely to be subject 10 the estate tax and desire the residence be retained in the family for generations.

Surviving the QPRT

If the grantor survives the length of the QPRT, then the grantor trust terminates. The ownership is transferred per the terms of the QPRT to the beneficiaries, who may be:

* Individuals, usually the children as tenants in common or an LLC.

* A new trust. Usually one or more of the children are trustees.

* The existing trust with children as trustees.

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