Vol. 6, No. 3, Pg. 44. Qualified Personal Residence Trusts: Have Your GRITS And Eat Them, Too.

• Author: By David C. Humphreys Jr.

South Carolina Lawyer

1994.

Vol. 6, No. 3, Pg. 44.

Qualified Personal Residence Trusts: Have Your GRITS And Eat Them, Too

44Qualified Personal Residence Trusts: Have Your GRITS And Eat Them, TooBy David C. Humphreys Jr.Introduction

Every taxpayer is allowed a transfer tax credit that equals a $600,000 exemption for purposes of calculating estate and gift taxes. This exemption equivalent, however, in terms of real dollars, becomes less and less valuable as time passes because assets tend to appreciate in value while the $600,000 exemption equivalent stays the same. This is of particular concern in South Carolina where much individual wealth is concentrated in personal residences and vacation homes with a history of rapid appreciation. The task of the estate planning practitioner is not only to ensure that his or her clients take advantage of all allowable deductions, exemptions and credits, but that the clients have in place plans that leverage the tax breaks allowed by law. This article will discuss a non-abusive leveraging technique by which a taxpayer can use a personal residence in concert with a trust to achieve significant transfer tax savings.

Foundation for a House GRIT: § 2702

In 1990, Congress enacted § 2702 of the Internal Revenue Code (IRC) to abolish the discounting of the value of gifts to family members where the transferor retained an interest in the gift. A significant exception to the general rule of this section is delineated in IRC Section 2702(a)(3). This section provides for the creation of a certain type of grantor-retained interest trust (GRIT), known as a qualified personal residence trust (QPRT), enabling a taxpayer to make a discounted gift of his or her personal residence while retaining the right to live there. For purposes of this article and because it is easy to remember, this type of trust will be called a "House GRIT"

In order to understand how a"House GRIT" works, one must first look to the definition of a personal residence. A personal residence is one's principal residence as defined in IRC § 1034, any other residence as intended by § 280 A(d)(1), but without regard to § 280A(d)(2) or a fractional interest in either (Reg 25.2702.5). Simply put, a personal residence is one's home, one's vacation home or a joint interest in either. Taken a step further, every taxpayer can have two...