Tax Saving Techniques - Qualified Personal Residence Trust

The Qualified Personal Residence Trust (QPRT) is a technique that helps minimize the taxation of an estate over two exemptions ($3,000,000). You can transfer your house (and also a vacation property) into Residence Trusts that will allow you to keep exclusive possession of it for a period of time and eventually have it transferred to your children at a substantial discount.

For example, if on January 1, 2005 a 50-year-old transferor placed a $1,000,000 property in trust for a term of 20 years, that person would potentially achieve death tax savings of $938,437.

The QPRT would provide that you (the “transferor”) would receive rent-free use of the property for a specified term, and the discount would be calculated on your life expectancy. This can be any length of time, but the longer the term, the greater the discount. If you don't survive the specified term, the property comes back to the estate as if it was never done in the first place, with no downside risk. But if the grantor survives the specified term, the property would be continued in a new trust for your spouse, if living, and if not, distributed to your children.

After the distribution, you could also rent the property back from your children, at a fair rental value, if you wish to continue to use the property.

There would usually be no federal gift tax paid upon transferring the residence to the trust, since the amount of the gift would be sheltered from a tax payment by a portion of your $1,500,000 exemption.

The transferor must outlive the term of the QPRT to accomplish the desired estate tax savings. If the transferor dies during the trust term, the trust principal will be included in the estate at its value at the time of death, and no estate tax savings will result. However, you will be in no worse a position than if you had not established the QPRT in the first place.

Connecticut has a gift tax that would be imposed upon the funding of a QPRT. This tax would be calculated at graduated rates of up to six percent of the amount of the gift.

In short, there is much to be gained by using the QPRT for two primary reasons:

1. Any capital appreciation of the residence after the date of the gift will be for the benefit of the children at no gift or estate tax cost, assuming the transferor survives the selected trust term.
2. The IRS actuarial tables allow the transferor a strong leverage in the use of the exemption.

It is also important, however, to recognize that realizing the estate tax savings with this method may result in a capital gains tax cost. When property passes at death, the cost basis of the asset becomes the fair market value of the property received valued at death, and no capital gains tax will be incurred upon the sale of the asset. However, when property is gifted, the recipient of the gift assumes the donor’s cost basis.