Tax Benefit Example

For example, if a 60 year old client has two children and a vacation home worth $5.0 million, and the client wishes to gift the vacation home to her children today, the client would use virtually all of her available exemption amount to avoid having to pay federal gift tax on the gift. This gift would reduce the amount the client could transfer estate tax-free at death to $430,000. With a QPRT, the client can reduce the tax impact of the gift while still transferring the home to her children. If the client transfers the vacation home to a 10-year QPRT in March 2015, the value of the gift for gift tax purposes would be $3,571,750, saving $1,428,250 of exemption that could be used for other lifetime gifts or applied to assets at death. Assuming the client survives the 10-year term, the home would then be transferred to her children in March 2025, free of gift and estate tax, and the QPRT would end. Alternatively, the home could be held in continuing trust for the children after 2025 if the client so provides in the QPRT document.

If the client in this example wishes to continue to use the vacation home after the expiration of the 10-year term, she would need to lease the home back from the children (or the children’s trust) at a fair market rental value in order to be in compliance with IRS regulations. This is another benefit of the QPRT arrangement – the client can further reduce her taxable estate by making rent payments to her children which would not be considered to be additional gifts and would not count against her exemption amount. If a continuing trust is not used, the children would, however, need to report the rent as income taxable to them.

An individual may have up to two QPRTs – one for a primary residence and one for a vacation residence. The donor must use such residence as a dwelling unit for personal purposes for a number of days each year prescribed by the IRS. A married couple can therefore have up to four QPRTs together – one per spouse per residence, assuming each spouse owns an interest in each residence.

Treatment of Residences with a Mortgage

It is best to transfer a non-mortgaged residence into a QPRT given some of the practical problems mortgaged property in a QPRT can present. If it is not avoidable, the mortgage payments the donor makes during the QPRT term would be considered additional gifts of equity to the QPRT and would need to be carefully reported to the IRS on a gift tax return for each year in which they are made. Alternatively, if a non-mortgaged property is transferred into a QPRT, the donor would only need to file one initial gift tax return.

Summary

An estate plan with a QPRT is not the right fit for every client, but it can be a clever way to leverage your gift and estate tax exemption and realize a significant tax savings for your family. Every situation is unique, and it’s essential to consult with your estate planning attorney and other advisors before undertaking a complex plan involving a QPRT. Riverview welcomes the opportunity to speak with you personally about whether a QPRT is a worthwhile vehicle for you to consider.

SOURCES:

1. www.journalofaccountancy.com/Issues/2006/Oct/TheAbcsOfQprts.htm
2. www.forbes.com/sites/ashleaebeling/2014/10/30/irs-announces-2015-estate-and-gift-tax-limits/
3. www.nysscpa.org/cpajournal/2005/1205/essentials/p52.htm
4. Collins Law Corporation: “Asset Protection: QPRT.”
5. Branch Banking and Trust Company: “Qualified Personal Residence Trust.”

Contributors: Paula Pienkowska is Director of the Wealth Advisory Group at Riverview Capital Advisers. Alan Arcadipane is a Business Analyst of the Business Advisory Group at Riverview Capital Advisers. Peter Gnall is a Private Wealth Adviser of the Wealth Advisory Group at Riverview Capital Advisers. Melysa Latham is a member of the Business Advisory Group at Riverview Capital Advisers.