 |  |  |  |  |
 |
 |
 |
 |
 |
|
|
|
|
|
|
B
F
A
R
Qualified Personal Residence Trusts, QPRTs, should be the strategy of choice for many of your clients
interested in reducing their federal estate tax liability.
What is a Qualified Personal Residence Trust (usually called a q-pert)? This unique Trust is essentially a
discounted gift to family members, usually of a personal residence, either a primary home or vacation retreat.
The best property for such a Trust is a residence that is likely to appreciate in value and that will probably be
retained by the family. Waterfront and view property in Northern Michigan especially should be placed in a
QPRT if there is any potential estate tax liability for your client.
The QPRT requires the owner(s)/donor(s) to gift the residence to a Trust while retaining the right of occupancy
for a term of years that is less than the donor’s life expectancy. The donor keeps a reversion in the case of
death prior to the end of the Trust term (sometimes referred to as the "term"). The reversion reduces the value
of the gift to family members (which must be reported on a Form 709 - Federal Gift Tax Return even though no
gift tax is actually due).
This is a must-do strategy to leverage the client’s lifetime estate tax exemption and get any appreciation out of
the donor’s taxable estate. A QPRT is a great tactic for those who don’t want to pay gift taxes, but still want to
reduce their potential estate tax liability.
How Does a QPRT Work?
A donor or donors transfers their property to a Qualified Personal Residence Trust, retaining the exclusive
right to use and enjoy the property for the specified term of years (the "term"). The longer the term and the
older the donor the more benefit can be obtained from a QPRT if the donor outlives the term.
If the donor does not outlive the term, nothing is lost by the exercise except the nominal professional fees
required to set it up. If the donor outlives the term, he (they) is a winner, having achieved significant estate tax
savings and shedding any appreciation in the property.
Does the donor have to move out if he (they) outlives the term? Not at all. The QPRT agreement would
normally provide that the donor could rent the property back at a fair rental value for as long as the donor
chooses to keep occupancy.
What if the donor balks at paying rent to his kids? At first blush, this may not be an appealing alternative, but
when presented as a means as transferring money to the next generation, free of gift tax, rental payments
take on a different light and are much more palatable.
What if the donor wants to sell the property during the term? Because the QPRT is a Grantor Trust for income
tax purposes, any gain on the sale of the residence can be tax free up to $500,000 for a married couple if the
property is a principal residence. Proceeds of the sale can be invested in a new residence, owned by the
Trust, to be occupied by the donors till the end of the term. As a Grantor Trust, any mortgage interest and
taxes continue to be deductible during the term.
What if there is significant gain in the property and the donor wants to hold onto the tax free gain provision
after the term? This can be accomplished by making a second trust the beneficiary after the term has ended.
Are there any other ways that a QPRT can fit into an estate plan? It is often recommended that a QPRT be
coupled with an Irrevocable Life Insurance Trust (ILIT) whereby the residence is transferred over to the ILIT at
the end of the term to assist in, or implement, the roll out of a split dollar insurance plan in the ILIT. This
involves sophisticated tax planning, but is something that often can be a very valuable device where a split
dollar plan is utilized with an ILIT to leverage the GST and gift tax exemptions.
NOW IS THE TIME
The Applicable Federal Interest Rate (AFR) has increased from 5.6% in early 1999 to 8% recently. This
interest rate increase makes a QPRT all the more attractive. How is that? The higher the AFR, the lower the
taxable gift. (This is some consolation for clients with floating interest rate loans or credit card debt). For
example, in the case
of a 70 year old donor with a 12 year Trust term, the taxable gift would be 30% at an AFR of 5.6% and only
23% at an AFR of 8%. In other words, the taxable gift on a $500,000 would be $35,000 less than it would have
been in early 1999. This has got to be making lemonade out of lemons.
DISADVANTAGES
What are the disadvantages of a QPRT? One is the complexity of the concept. Another is the reluctance of
clients to involve their personal residence in tax planning and the possible loss of "control". A third would be
the fact that there is a carry over basis of the property which would need to be taken into account in planning
for possible sale of the property at the end of the term.. However, the capital gain rate of 20%, should there be
a tax due on the sale of the residence many years down the road, is certainly much less than the estate tax
rate of 55% that would be paid if the property were retained by the donor.
MARRIED COUPLES
How do QPRTs work for married couples? For many reasons which we do not need to get into here, it is
advisable for each spouse to have his or her own QPRT for an undivided interest in the property. In this case,
the respective terms can be different based on the comparative ages and health of each spouse, and their
respective taxable estates.
NO TIME TO LOSE
This is a winning strategy for older clients with appreciated real estate in Northern Michigan, who are facing
an estate tax liability. It leverages lifetime exemption and is about as painless as a tax saving strategy can get.
Urge your clients to act now while interest rates are high and taxable gifts are lower.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| June 2000 QPRTs - NOW IS THE TIME by James R. Modrall III, J.D., C.P.A. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |