| Wealth management is an important issue for those | | | | to pay trust expenses, mortgage payments, or |
| with substantial assets to protect. Many people | | | | improvements within the next six months. While |
| incorrectly assume that their estates will escape | | | | expenses may be paid from the trust, it will generally |
| federal estate tax as a result of underestimating what | | | | be easier for you to pay them directly. The trust is |
| their principal residence will be worth when they die. | | | | permitted to hold insurance on the property, as well as |
| Often, our homes are our most valuable assets. The | | | | any proceeds as a result of damage to the residence |
| Qualified Personal Residence Trust (QPRT) provides a | | | | that are intended to be used for repair or replacement. |
| means for significantly reducing the estate tax | | | | The proceeds must be held in a separate account. |
| consequences of the family home and one vacation | | | | If you intend to continue residing in the residence after |
| home. The QPRT also provides an excellent asset | | | | the trust expires, a fair market value rental will have to |
| protection vehicle since you no longer own the | | | | be paid to the children to avoid estate inclusion. |
| property once the trust is established. | | | | How do I Terminate a QPRT? |
| The following is a summary of the benefits and | | | | If the term of the trust expires during your lifetime, the |
| features of a Qualified Personal Residence Trust. | | | | residence will pass from the trust to the remainder |
| What is a Qualified Personal Residence Trust? | | | | beneficiaries. The terms of the trust can state that you |
| A QPRT is an irrevocable trust created by the | | | | have the right to rent the residence. IF you fail to |
| Grantor (yourself) for your own benefit. The Grantor | | | | survive the term of the trust, the trust will end. Your |
| transfers a primary or secondary residence into the | | | | interest in the QPRT will be includable in your estate. |
| trust and retains the continued right to use the | | | | Your estate would get credit for any gift tax that had |
| residence for the term of the trust. You, as Grantor, | | | | been paid. |
| select a term of years that the trust will exist. After | | | | What are the Tax Consequences of a QPRT? |
| the trust ends, the residence will pass to the named | | | | The advantage of the QPRT is the reduced estate |
| trust beneficiaries. | | | | and gift taxes on the gift of the property. The transfer |
| How is a QPRT established? | | | | of the residence to the trust is subject to gift tax and |
| A formal appraisal should be obtained to substantiate | | | | will consume the unified credit to the extent of the |
| the value of the residence on the date of transfer to | | | | taxable gift. A gift tax return will be required no matter |
| the trust. The Grantor makes a taxable gift to the | | | | how small the remainder is because it will not qualify |
| trust. The taxable gift is the fair market value of the | | | | for the annual exclusion. However, the taxable gift will |
| transferred residence reduced by the value of the | | | | be significantly less than the value of the property, |
| interests retained by the grantor. Because the | | | | since the taxable gift is only a percentage of the value |
| remainder is a future interest, it will not qualify for the | | | | of property transferred to the QPRT based on your |
| $10,000 annual exclusion. The taxable gift will be | | | | age and the terms of the trust. |
| determined by using the actuarial tables in IRS | | | | The full value of the trust assets are exempt from |
| Publication 1457 to value the remainder, taking into | | | | estate tax if you survive the term of the trust. The full |
| account the two values retained by the grantor, i.e. (i) | | | | value of the trust assets are taxed in your estate if |
| the right to income for the term of the trust, and (ii) the | | | | you fail to survive the term of the trust. |
| right to receive the property back if the grantor dies | | | | All income and deductions are reported to you, as |
| during the trust term. The table determines the rate by | | | | grantor. A separate income tax filing is not required if |
| taking into account the term of the trust and your age | | | | you are also the trustee. Your children, as remainder |
| at the time of the gift to the trust. | | | | beneficiaries, will receive a basis in the property equal |
| How is a QPRT Operated? | | | | to your basis in the property. |
| The trust document must prohibit the sale of the | | | | California does not impose a property transfer tax |
| residence held in the trust to the Grantor, the | | | | when a QPRT is established because it is a gift |
| grantor’s spouse, or any entity controlled by either | | | | transaction. Recording fees for the new deed will be |
| of them. The trust should also be prohibited from | | | | imposed. |
| holding any asset other than a residence used by the | | | | As an example, if the residence is valued at $1,000,000 |
| Grantor as a personal residence. Personal property, | | | | and you transfer the property to the QPRT at age 60, |
| such as furnishings, may not be held in the trust. The | | | | for a term of ten years, the following will result: |
| document must require that net income be distributed | | | | Property Value |
| annually to the grantor. The document may permit the | | | | $1,000,000 |
| sale of the residence and may permit the trust to hold | | | | Grantor Age |
| proceeds from the sale of the residence, in a separate | | | | 60 years |
| account. | | | | Trust Term |
| You, as Grantor, will have unlimited access to and use | | | | 10 years |
| of the residence. You have the right to occupy the | | | | Federal Rate |
| property, have guests join you at the property, receive | | | | 8% |
| the rental income if the residence is rented to third | | | | Value of Taxable Gift |
| party persons, and sell and purchase other substitute | | | | $377,565 |
| property. You are responsible for paying all expenses | | | | Value of Retained Interest $622,435 |
| relating to the property. | | | | The values would obviously change as any factors |
| Cash additions may be held in a separate account in | | | | change. |
| an amount that does not exceed the amount needed | | | | |