Qualified
Personal Residence Trust (QPRT)
Ordinarily if
someone transfers assets in which he or she retains an
interest the value of the retained interest is ignored for
gift tax purposes. In other words the value of the gift is
the total value of the assets involved. However, this rule
does not apply under certain circumstances if the asset
transferred is the transferor's residence.
The transfer must
be of the transferor's residence. This is a residence used
by the transferor for the greater of at least 14 days per
year or, if it is rented to others, used by the transferor
at least 10 per cent of the days that it is rented.
Fractional interests in the residence can be held in the
trust. The trust can contain a reasonable amount of adjacent
land.
Only one
residence can be in the trust. Nothing else except, with
limited exceptions, proceeds payable as a result of damage
to the residence provided the trust requires them to be
reinvested in a residence. Sale proceeds do not
qualify.
The transferor
retains the use of the residence for a term of years at the
end of which the residence goes to someone else, usually the
transferor's children. The trust is structured so that all
income, credits and deductions of the trust are attributable
to the grantor for income tax purposes.
Upon creation of
these trusts there is a gift of the present value of the
remainder. See the material on grantor retained annuity
trusts (GRATs). As in a GRAT, if the grantor dies during the
trust term the residence remains in his or her taxable
estate. If the grantor survives the term, the property is
out of the taxable estate.
There are two
types of these trusts, one is a personal residence trust and
the other is a qualified personal residence trust. The rules
for the qualified trust are some what more
liberal.
These trusts are
used to give a residence to children at discounted values
for gift tax purposes. If the grantor does not survive the
term there is no harm done since, while the residence is in
the taxable estate, the estate gets credit for gift taxes
paid.
The grantor
cannot retain a right to use the residence after the trust
term, but the residence can continue in trust with a
provision requiring it to be rented to the grantor's spouse.
Or the grantor can continue to live in the residence and
rent it from his or her children, just so long as this was
not prearranged.
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