Forums Support Library KEA – Kugler Estate Analyzer™ Qualified Personal Residence Trust (QPRT)

Viewing 0 reply threads
  • Author
    Posts
    • Kathleen Reynolds
      Keymaster
      Post count: 428

      QPRT Screen
      A QPRT is an arrangement whereby the grantor gifts a personal residence to an irrevocable trust and retains the use of the residence for a stated period of years. At the end of the trust period, the residence passes to the remainder beneficiary (e.g., grantor’s children). The grantor must report the present value of the remainder interest as a future interest gift. Should the grantor die during the term of the trust, the residence is included in his/her estate with credit for any gift taxes paid and/or unified credit attributable to the QPRT.

      You create an irrevocable trust. You direct the trustee to pay you the income from the trust for a specified number of years or allow you possession of the trust’s property. When your interest terminates at the end of the years you’ve selected, the property in the trust is distributed to family members or the other individuals you have chosen. In some cases, the trust continues for their benefit.

      When you put cash or assets into the trust, you made what is called a “future interest” gift. The value of that gift is the excess of the value of the property you transferred over the value of the interest you kept. The value of your retained interest is found by multiplying the principal by the present value of an annuity factor for the number of years the trust will run.

      For example, assuming a 7.6% federal discount rate, if the trust will run for ten years and $100,000 is initially placed into the trust subject to a reversion, the value of the (nontaxable) interest retained by a 65-year-old would be $64,590.

      The value of the (gift taxable) remainder interest would be the value of the capital placed into the trust ($100,000) minus the value of the nontaxable interested retained by the grantor ($64,590). Therefore, the taxable portion of the grantor retained income trust gift would be $35,410. This remainder interest, by definition, is a future interest gift and will not qualify for the annual exclusion. The donor will have to utilize all or part of the remaining unified credit (or if the credit is exhausted, pay the appropriate gift tax).

      The longer term you specify the larger the value of the interest you have retained – and the lower the value of the gift you have made. Theoretically, if the term you select is long enough, the value of your retained interest approaches actuarially 100 percent. This essentially eliminates any meaningful gift tax liability.

      The advantage of the GRIT is that it is possible for you to transfer assets of significant value to family members but to incur little or no gift tax. In the example above, the cost of removing $100,000 from the gross estate (plus all appreciation from the date of the gift) is the use of $35,410 of your constantly growing unified credit.

      The GRIT is a “grantor trust.” This means all income, deductions, and credits are treated as if there was no trust and these items were attributable directly to you, the grantor.

      The entire principal (date of death value) must be included in the estate of a grantor who dies during the term of the GRIT since he has retained an interest for a period which, in fact, did not end before his death. If any gift tax had been paid upon the establishment of the GRIT, it would reduce the estate tax otherwise payable. If the unified credit was used, upon death within the term, the unified credit used in making the gift will be restored to the estate (if the grantor’s spouse consented to the gift, his or her credit will not be restored). So the trick is to select a term for the trust that you are likely to outlive.

      Quite often, the estate’s beneficiary (possibly through gifts you make) will purchase life insurance on your life. Then, if you should die during the term of the GRIT, the tax savings you tried to achieve will be met through the life insurance and there would be sufficient cash to pay any estate tax.

      IRC Code §2702 has severely limited the use of GRITs. Non-family members can use GRITs for any type of asset for any term. Family members will find GRITs useful only when the property transferred is a personal residence or for certain tangible property.

      The regulations under §2702 allow two different kinds of trusts to hold personal residences, a “personal residence trust” (PRT) and a “qualified personal residence trust” (QPRT). A PRT is very limited and inflexible, because it must not hold any assets other than the residence and must not allow the sale of the residence. A QPRT can hold limited amounts of cash for expenses or improvements to the residence and can allow the residence to be sold (but not to the grantor or the grantor’s spouse). However, if the residence is sold, or if the QPRT ceases to qualify as a QPRT for any other reason, either all of the trust property must be returned to the grantor or the QPRT must begin paying a “qualified annuity” to the grantor (much like a grantor-retained annuity trust, or GRAT).

      What is a Minority Discount?
      A minority interest discount may be applicable to the value of the asset being gifted. Generally, due to issues of control, a minority interest in an asset will be worth something less than its proportional share of the overall asset value. For example, a 1/3 interest in a partnership will not be worth 1/3 of the overall value, because someone who owns 1/3 of the partnership lacks control over any investment-related decisions.

      The discount can be obtained when the asset is gifted to multiple beneficiaries. The system limits any minority discount to 50% or less.

      Click the Edit button to set the specifications of the QPRT:

        • The name of the QPRT
        • The year in which the transfer takes place
        • The §7520 rate
        • Then choose the asset for funding the QPRT from the pulldown menu (the program lists available assets).
        • Enter the Minority Discount rate.
        • Enter the years of the term of the trust.
        • Verify the amount listed as principal.
        • Enter the client’s age or click the Use Nearest Age button to have the program calculate it for you.
        • If you want to fund the life insurance premiums via a QPRT, check yes, and this adds a new report.
        • To select the asset to use to fund this technique, click the ‘+’ button.
        • If you want to fund the life insurance premiums via a QPRT, check yes, and this adds a new report.
Viewing 0 reply threads
  • You must be logged in to reply to this topic.