Using debt to leverage a taxable gift to a QPRT.

• Author: Benner, Chris
• Position: Qualified personal residence trust

A wealthy client recently wanted advice on how the purchase of a vacation home might affect her estate plan. She was 66, a widow, and in good health. She had a large taxable estate and had a little less than half of her applicable unified estate and gift tax credit remaining. The property she planned to purchase was expected to appreciate significantly in the long term, and she was concerned that the property could trigger significant estate taxes. While she wanted to enjoy the property during her life, she also wanted to pass the property on to her adult children. Given her situation, a qualified personal residence trust (QPRT) could help her achieve her goals.

QPRT Basics

A qualified personal residence trust is a trust created to own a personal residence of the grantor for the benefit of the grantor's spouse, children, or charity. The grantor makes a gift of a personal residence into the trust while retaining a right to occupy the residence for a term of years. Once the term is up, the grantor relinquishes the property to the beneficiaries, and the asset is gone from the grantor's estate.

When the grantor contributes the property to the QPRT, a taxable gift has been made to the beneficiaries for the remainder interest in the property. To determine the amount of the gift, one has to calculate the value of the retained interest by the term holder. The value of the term has an actuarially determined value that consists of two components: a reversionary interest and an income interest. The reversionary interest is the value of the chance that the property might revert to the estate if the term holder does not outlive the term of the trust. The income interest is the value of the retained right to live in and use the property during the term. Both interests are calculated using the applicable Sec. 7520 rate and valuation tables.

Planning tip: As the applicable Sec. 7520 rate increases, the value of the remainder interest goes down, as does the taxable gift in turn. Similarly, an older grantor decreases the value of the remainder interest, as does extending the term of the trust. A client with a large estate who is in good health and is older (and if the Sec. 7520 rate is favorable) might be a good candidate for a QPRT.

A QPRT can own only one personal residence of the grantor and certain other assets. A personal residence for purposes of a QPRT is one for which the "primary use" is for that of the term holder when occupied by the term holder...