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Measure content performance. Develop and improve products. List of Partners vendors. A qualified personal residence trust QPRT is a specific type of irrevocable trust that allows its creator to remove a personal home from their estate for the purpose of reducing the amount of gift tax that is incurred when transferring assets to a beneficiary. Qualified personal residence trusts allow the owner of the residence to remain living on the property for a period of time with "retained interest" in the house; once that period is over, the interest remaining is transferred to the beneficiaries as "remainder interest.
Depending on the length of the trust, the value of the property during the retained interest period is calculated based on applicable federal rates AFR that the Internal Revenue Service IRS provides. Because the owner retains a fraction of the value, the gift value of the property is lower than its fair market value FMV , thus lowering its incurred gift tax.
This tax can also be lowered with a unified credit. A qualified personal residence trust can be useful when the trust expires prior to the death of the grantor.
In this case, there may be little income tax benefit to the termination, so the potential for estate tax risk if the law changes might make retaining the trust the best decision. Too often, individuals will only look at the annual cost and hassle of maintaining a trust and not the big picture. CPAs need to take care when responding to demands that are potentially costly and imprudent.
At minimum, consider communicating and corroborating the downside risks of unwinding an old plan. What about the legalities of the transfer of the deed in the above example? Does the trustee of the QPRT have the authority to merely deed the house back to the trust?
Without fair consideration for the transfer of the house, this is unlikely. The trustee has a fiduciary duty to the beneficiaries of the QPRT, and the trustee must adhere to the terms of the trust. Deeding a valuable house back to the settlor without commensurate consideration could expose the trustee to liability.
What if the settlor marries a new spouse after the re-transfer? If the transfer of the house was not permitted under the instrument, is the IRS bound to recognize the step up in basis? If the trustee had no authority to transfer the house, will the settlor be able to transfer good title to the house if she ever sells it in the future?
If the trustee did not have legal authority to transfer the house, will a future buyer require signoffs by the trustee and beneficiaries of the QPRT in order to receive good title to the property?
What are the costs and problems involved in such a transaction? Regulations prevent taxpayers from taking advantage of the nonrecognition rules to repurchase a house from a QPRT [Revenue Ruling ; Treasury Regulations section Before the house is simply deeded the house to the grantor, the QPRT document should be reviewed, and the date of the QPRT observed, to determine the applicability of this regulation.
Might rescission be feasible? In Craig Breakiron v. Lauren Breakiron Gudonis No. The law actually requires that the disclaimer be made within nine months of the creation of the QPRT. Because of this incorrect advice, the disclaimer was not qualified, and the taxpayer incurred a gift tax liability.
The taxpayer requested that the court permit him to rescind the disclaimer and void the transfer; because it was based on a mistake that frustrated the purpose of the transfer, the court permitted the rescission, and the taxpayer avoided gift tax.
While this case presents an interesting avenue for fixing a plan gone awry, it is not likely to provide a basis to unravel prior planning absent unique circumstances. Might an argument of mistake permit recasting a no-longer-beneficial transaction? In Simches, Trustee 1 v. Simches, Trustee 2 and Others Mass. Unfortunately, this case would not seem to apply to resolve no-longer-beneficial tax planning that was viable, rather than a mistake, when created.
Apart from the legal issues and impediments in making a transfer, what of the liability exposure of deeding a house out of a trust back to an elderly individual? What becomes of the house if the settlor enters a nursing home?
What about liability and other insurance coverage? Is it adequate? Will the settlor know to update coverage once the trust is no longer owner? An uninsured risk could wipe out the value of the house. The passing of the Tax Cuts and Jobs Act TCJA brought about significant changes to the estate planning arena, doubling the lifetime exemption through December 31, Generally speaking, a properly structured trust can protect assets — such as real estate, bank accounts and personal property — from creditors, lawsuits and judgements.
When assets are transferred to a trust prior to any creditor claims, they are considered separate from the grantor. If a subsequent claim arises in which the grantor is sued, the assets in the trust cannot be touched; only assets personally owned by the grantor can be pursued. Specifically, a QPRT is an irrevocable grantor trust, which allows an individual to take advantage of the gift tax exemption by putting a personal residence, either primary or secondary, into a trust.
The grantor determines how long he will retain possession and use of the residence. Once the term is up, ownership is passed onto the beneficiaries. Primarily, a QPRT:. When set-up properly, a QPRT can provide a valuable means of asset protection to your estate.
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