Terminated QPRTs Result In Interesting Opportunities

by Bruce Givner on February 24, 2015

The following post was taken from our Feburary 2015 newsletter. Click here to subscribe to our monthly newsletter

Over the past almost four decades we have helped hundreds of families implement qualified personal residence trusts.  The purpose of a QPRT, as originally designed by Congress, was to allow the parents to pass the equity in the residence to the next generation at a low gift tax cost.  In many situations QPRTs have been created because they are terrific structures to put a hurdle between that valuable equity and some future plaintiff.

Once the QPRT ends, the residence is transferred to an irrevocable trust for the benefit of the children.  (Other law firms sometimes have the residence transferred outright to the children, a result we do not like since it is easier for the parents to control a trust for the children than it is for them to control the children.  Also, a trust for the children provides creditor protection for the children.)

One problem is that the children's trust has the same low basis in the residence that the parents had.  Wouldn't it be nice if the parents could buy the home from the children's trust so that, upon the first parent's death, the home would receive a "step-up" in basis to the date of death fair market value?  As a result, the children would get the best of both worlds: estate tax exclusion of the value of the residence and a high (date of death) basis for a future sale.

Unfortunately, the IRS Regulations require the QPRT and any resulting trust to contain a provision prohibiting the parents from buying the home from a grantor trust (a trust which is disregarded for income tax purposes).  Buying the home from a non-grantor trust would be an income tax disaster.

If you are interested in pursuing this planning (both estate tax exclusion and an increased basis), please contact us today. We have an interesting alternative for you to consider.

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