By Cowles Liipfert & Don Wells

A QPRT Is a trust in which a grantor or grantors transfer their primary residence or a secondary residence to the trust, retaining the right to use the residence rent-free for a term of years.

If the value of the house is $500,000, for example, and the grantors retained a right of occupancy for 10 years, the value of the retained interest would be calculated under the federal actuarial tables at the time of the gift. In May 2024 the value of the retained interest of the grantor would be $283,630, so the taxable gift would be $500,000 minus $283,630 = $216,370, less any applicable gift tax annual exclusions.

If parents wanted to give their personal residence to their child and the child’s spouse, subject to their right of occupancy for 10 years, they would qualify for a total of $72,000 In annual gift tax exclusions.($!8,000 for the gift from H to the child, $18,000 from H to the child’s spouse, $18,000 from W to the child, and $18,000 from the W to the child’s spouse), which would result in taxable gifts of $216,370 from the previous paragraph minus $72,000 in annual exclusions = $144, 370.

Thus the parents would use up $144,370 of their lifetime gift tax exclusions (currently $13.61 million apiece) to give away a $500,000 residence. In addition to giving away the personal residence at a value of $144,370, the donor would benefit from any post-gift appreciation in the value of the house, which might be conservatively valued at $250,000 after 10 years.

Sounds too good to be true??

There are some drawbacks to the plan, however. Including:

1. If the grantor passes away before the end of the trust term, the tax benefits described above are lost because of the grantor’s retained interest at the time of death, and the property ends up In the grantor’s taxable estate – just like the gift to the trust had never been made,
2. The gift is irrevocable. The donors cannot cancel the trust or change the terms of the trust agreement after the gift. The QPRT can be terminated prior to the end of the trust term only by the death of the grantor.
3. If there is an outstanding mortgage balance at the time of the gift. It greatly complicates the above-described tax scheme, so it is recommended that you not utilize a QPRT unless you own your house outright and free of trust.

How many QPRTs can a person have?

A few people have more than one secondary home, but if they do, an individual may have up to 2 QPRTs at one time, so a married couple can have up to four QPRTs. However, if a QPRT terminates by its terms, that frees up a slot for another QPRT and the grantor may have a replacement QPRT is place of the expired QPRT.

Can a house in a QPRT be sold?

Yes. If the terms of the trust agreement allow the proceeds of sale to be held by the trust and used to buy a new house, the net proceeds may be used to purchase a replacement home or secondary residence within 2 years after the sale. If the replacement property is of greater value than the net proceeds from the sale, an additional gift may be made and the replacement home will be subject to the remaining term of the trust.

If the home is sold and the replacement home is of a lower value than the net proceeds from the old home, the excess proceeds would not be a qualified asset of the QPRT, so the Grantor must either distribute those assets within 30 days, or transfer those excess proceeds to a Grantor Retained Annuity Trust (GRAT) for the remaining term of the QPRT.

What if the H & W currently own their residence jointly?

If the H & W own their residence jointly, it is not recommended that they create a joint QPRT, because of the higher probability that one of them might die before the end of the trust term.

It is recommended that the house be conveyed to one of them, who would create the QPRT in his or her separate name, or that they deed the property into both names as tenants in common without survivorship, after which they could deed their half interests into two separate QPRTs. With two trusts, at least a half interest would remain in a QPRT if one of them died.

If a couple own both a personal residence and a vacation home, they could deed those properties into separate names and have two separate QPRTs, one owned by the H and one by the W.

What happens at the end of the QPRT term?

At the end of the QPRT term the residence belongs to the residuary beneficiaries. The spouse of a QPRT Grantor may be a residuary beneficiary, in which case he or she may occupy the residence without rent. The grantor spouse may stay as a guest of the beneficiary spouse, but without a legal right to stay there. Another alternative would be for the H & W to start paying rent to the remainder beneficiaries, in which case they would reduce their taxable estates by the amount of rent paid.

If the trust agreement names the spouse as a lifetime remainder beneficiary at the end of 1O years, the spouse could execute a timely qualified disclaimer, and the ownership would vest in the other remainder beneficiaries, which would enable them to pay rent, despite the fact that the spouse was named a residuary beneficiary in the trust agreement.

Conclusion

A QPRT may be described as a gamble. If the Grantor dies before the end of the trust term -you lose! If you outlive the trust term, you win! Consequently, one should be conservative when setting the term of the QPRT.