Donald M. Thompson - Wills, Trusts, and Estate Planning


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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Donald M. Thompson * 55 W. Monroe #3950; Chicago, IL 60603
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