What is does the acronym Q.P.R.T. mean, and what is it?
There was once a video game in the 1980s called Q-Bert. This is not that game. A Q.P.R.T. is an acronym (pronounced “cue-pert”) for a sophisticated estate planning technique that allows a person to reduce the value of his estate — and therefore minimize estate taxes — by moving an asset out of his estate at a lower value than the asset might actually have at the time of transfer or at death.
A Q.P.R.T., or “qualified personal residence trust,” is an estate tax savings technique. Although the trust loses popularity in low-interest rate environments, it is still a very effective an economical mechanism for mitigating your estate tax exposure, especially in light of the expected return to a limited $1 million federal and state tax exemption in 2011.
A qualified personal residence trust is a form of irrevocable trust, whose sole asset is the interest in your personal residence and other related assets if you so choose. It must comply with the requirements of I.R.C. Regulation 25.2702-5(c). The donor makes a gift of the residence to the trust — effectively to his descendants or the beneficiaries of the trust — and retains the right to occupy the residence for the term of a set period of time. At the expiration of that term, ownership of the residence passes to the beneficiaries of the trust. If the donor dies before the expiration of the trust’s term, the trust terminates and ownership of the residence returns to the estate of the donor (effectively losing the gamble). In short, the beneficiaries only receive the trust property at the end of the term — and only if the donor is still living at that time.
Why would someone make such a strange gift, and why would he jump through so many hoops to do so? The structure of the U.S. gift tax system offers a tax bargain for the donor in the qualified personal residence trust. The donor gets a discount in computing the value of his taxable gift for the interest he retains in the personal residence when he transfers it to the trust. If he survives the trust’s term, the entire property is out of his estate — even though he paid gift tax on only a discounted value. If he does not survive the term, the residence comes back into his estate and the trust did not save any taxes; but the taxes in that case are no higher than if the donor had never made the gift at all. In other words, the qualified personal residence trust is a gift tax bet that the donor can’t lose. Either the donor wins or he gets his money back. The trust discounts offer a highly tax-efficient way to make use of the client’s gift tax exemption, which is now $5.34 million and will increase each year with a cost of living adjustment (previously the Federal exemption was only $1 million and had incrementally increased to $5 million until it automatically reverted back to $1 million in 2010; however, Congress amended the law). The “gift” is complete when the residence is transferred to the trust and the value is fixed as of that date, discounted because of the donor’s retained interests.
Most qualified personal residence trust donors want to remain in their personal residence after the term expires. The donor must understand that he can do so but will need to pay rent. This is a formality that must be observed, otherwise the Internal Revenue Service could unwind the transaction. Many people balk at the idea — pay rent for my own home? But if you want the benefits, you have to pay the price. The residence technically belongs to the donor’s children (or remainder beneficiaries) or even the trust after the expiration of the term. If the donor continues to reside there without paying rent, the residence could be brought back into the donor’s estate, thus negating the tax-saving purpose of the trust.
The qualified personal residence trust is a complicated estate tax technique, and there are many facets that can only be explained and implemented by an attorney.
Alison Arden Besunder is the founding attorney of the law firm of Arden Besunder P.C., where she assists new and not-so-new parents with their estate planning needs. Her firm assists clients in Manhattan, Brooklyn, Queens, Nassau, and Suffolk Counties. You can find Alison Besunder on Twitter @estatetrustplan and on her website at www.besunderlaw.com.
