To QPRT or not to QPRT?

• Author: Koppel, Michael D.
• Position: Qualified personal residence trust

The area of estate and gift planning is an inexact science: Should a taxpayer give an "appreciating asset" now or later? How much advantage is there in letting heirs have a stepped-up basis?

These issues are often discussed in regard to various investments. Often forgotten is what (for many people) is their largest investment and one that usually has enormous appreciation--the personal residence.

This has changed. The qualified personal residence trust (QPRT) provides an easy method for transferring a residence to a person's heirs while still allowing the donor to live in the residence as if nothing had happened.

Even better, the transfer can be made at very substantial discounts from market value. The IRS created the QPRT through very specific regulations (Regs. Sec. 25.2702-5). While these regulations are not numerous, there are very specific requirements.

It is important to remember that the following requirements must be satisfied within the provisions of the trust document:

[] QPRTs apply only to an individual's principal residence and one other residence. The personal residence includes appurtenant structures used by the term holder and adjacent land not in excess of what is appropriate for residential purposes.

[] All the income, if any, must be paid to the term holder annually.

[] No transfers may be made to anyone other than the grantor during the trust's term.

The trust may receive only specific assets from the donor in addition to the residence. Cash contributions to the trust are limited to:

[] Sufficient cash to pay for trust expenses in the next six months.

[] Improvements to be made to the residence in the next six months.

[] Sufficient cash to purchase an initial residence. (There are significant restrictions on when and how cash can be contributed.

[] Cash to purchase a replacement residence within three months.

To be allowed, the trust document must specifically allow for these contributions. Additionally, if the trust document allows for these contributions, it must also provide that the trustee, not less frequently than quarterly, determine if there is excess cash. Any excess amounts must be immediately distributed to the term holder.

The trust must contain other restricting provisions, such as:

[] A prohibition on distributions, during the trust term, of trust corpus to anyone other than the term holder.

[] The trust must prohibit any prepayment (commutation) of the term holder's interest.

[] The property must be used...