Qualified Principal Residence Trust (including 2nd residences)

A grantor gifts his/her personal residence into a Trust for a specified period of time or term. After the term has passed, the residence is no longer includible in the grantor's estate and passes directly to the remaindermen. The grantor, however, can remain in the residence by providing grantor rent provision that have no income tax consequence.

Gift tax consequences
Estate tax consequences
Generation-Skipping Transfer Taxconsequences
Federal income tax consequences
Cautions....
The BIG advantage of the QPRT

Gift tax consequences The residence is valued for gift tax purposes at the remainder interest (using IRS actuarial tables and the AFR rate at the time of the gift). Generally, the higher the AFR, the lower the remainder interest. In effect, the value of the residence is decreased by the grantor's life interest. As the remainder interest is a future interest, the annual gift taxexclusion is not available for the gift.

Estate tax consequences

When the grantor dies prior to the lapse of the term - The value of the trust is included in the grantor's estate.

When the grantor dies after the lapse of the term - The Trust ceases being a grantor trust. The grantor's interest in the property lapses and therefore, the Trust is not included in the grantor's estate.

Generation-Skipping Transfer Tax consequences

If the grantor assigns remaindermen who are skip persons, generation skipping transfer tax will be imposed at the end of the grantor's term.

Federal income tax consequences

The Trust is a grantor Trust for income and expense purposes. If the trust makes the mortgage payments, the interest deduction flows out to the grantor. If the grantor makes the payments, he/she may deduct the interest personally only if he/she is personally liable on the mortgage. The Trust is taxed on any capital gains as the grantor has only an income interest. If the residence is sold, IRS regulations do not indicate whether the tax exemption on a gain of $250,000 for a single taxpayer or $500,000 for a married couple filing jointly is available. The basis of the residence to the trust and subsequently to the remaindermen is the grantor's basis adjusted for any improvements and the gift tax attributable to the appreciation from thetime of purchase to the time of the gift. If the grantor dies prior to the end of the term, the basis is stepped up (or down) to date of death value.

Cautions....

Very specific language and provisions must go into a qualified personal residence trust. If the grantor dies prior to the end of the term, the surviving spouse will not receive the remainder interest. However, since the Trust is includible in the grantor's estate, the marital deduction is available. If the grantor dies after the end of the term, the grantor cannot live in the residencewithout paying a reasonable rent. If the grantor lives in the residence without paying a reasonable rent, the IRS will try to put the Trust into the estate at death.

The BIG advantage of the QPRT

The appreciation of the residence from the time of the gift until the expiration of the term is kept out the grantor's estate (assuming the grantor survives the term.)

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