 Remember the QPRT!
By Paul Sehnert
While attending a recent meeting of the Midwest Estate Tax and Business Planning Institute, an East Coast attorney reminded us of an old estate planning friend: The QPRT.
The attorney, Natalie B. Choate, Esq., is with the Boston firm of Bingham McCutchen LLP and an expert as the author of Life and Death Planning for Retirement Benefits and The QPRT Manual. Both are leading resources for estate planning professionals. Her dissertation regarding the perks of the qualified personal residence trust (or QPRT) -- while not earthshaking news -- certainly bears consideration when addressing the estate planning needs of certain individuals.
As many estate planners are aware, the QPRT is an irrevocable trust that holds no assets other than an interest in one personal residence of the trust donor and certain other related assets. We have found this a particularly useful tool for clients who own valuable vacation properties that they wish to pass along to heirs. While the individual puts the residence in a trust, he reserves the right to enjoy the residence for a certain extended period of time. According to Choate, the QPRT is a “tax bargain” due to the structure of the gift tax. While today’s property may be worth $1 million, if the property is part of a QPRT gift trust, the value of the gift for gift tax purposes is less than one-third that amount.
Choate maintains QPRTs are easy, safe and guaranteed. Unlike family limited partnerships that face the risk of an IRS challenge and a myriad of other methods which are rather cumbersome, the QPRT is a tax-favored way of making use of the client’s gift tax exemption. Aside from the discount received for valuing a gift to a QPRT as “retained income interest,” an additional discount is received for “retained reversion” for that period past the time period specified in the initial Trust.
The only real challenge Choate sees with the QPRT is the looming “generation skipping transfer” (GST) tax. Sadly, this is an issue if an heir of the donor dies once the QPRT commences. At that point, the estate tax inclusion period would be put into play and the transferred property of the QPRT would still be included in the estate. She notes four approaches when setting up the trust that are possible solutions to this hurdle:
- QPRT remainder passes to “spray” trust for issue if child died during QPRT term;
- QPRT remainder passes only to living children;
- Force deceased child’s share of QPRT remainder into the deceased child’s gross estate, to make him the new “transferor” of that asset for GST purposes;
- Have separate trust shares for each child from the outset; allocate some of the donor’s GST exemption to the separate share of the deceased child if necessary.
Three years ago, the Internal Revenue Service issued a “Sample Qualified Personal Residence Trust.” While the sample form may provide a general framework for such trusts, it should be noted that there are many instances in which the form is inadequate and needs revision and or additional provisions. The GST is a good example of one of those instances.
While neither myself or my fellow trust administrators at Indiana Trust & Investment Management Company would consider ourselves experts in the area of the QPRT, we do recognize that proactively seeking out the insight of experts – such as Natalie Choate – is in the best interest of our clients.
After completing his studies at the University of Iowa , Mr. Sehnert began his career at the Trust Department of Harris Trust & Savings Bank, Chicago. Today, he is the Managing Director of Indiana Trust and Investment Management Company.
|
