Qualified Personal Residence Trust

What is it? A Qualified Personal Residence Trust (“QPRT”) is
a special trust used as an estate planning technique to leverage a gift of your
principal residence or vacation home out of your estate at a significant
discount from its current value. The technique, when successful (which requires
your outliving the term of the trust) can save substantial estate taxes.

Standard Use: You gift your house to a QPRT and reserve the
right to live in the house for a specified number of years, typically 5-10
years. After that time period the heirs own the house. Often you’ll reserve the
right to continue to lease the house after that term at fair market value.

Tailored Use: While QPRTs are typically used by older
taxpayers to save estate tax, you might consider using a QPRT even if much
younger for asset protection purposes. Suppose you are considering accepting a
position on a board of directors and are concerned about the potential
liability. You transfer your house to a QPRT for a 25-year term, lasting into
your retirement. In the event of a later suit or claim, absent a fraudulent
conveyance (e.g., you transfer the property after a claim arises against you),
the house is owned by an irrevocable trust with remainder beneficiaries having
an interest in the trust’s property.

Key: A QPRT can be more than just an estate plan, it can be
part of your asset protection plan to protect your house.

Creation of a Successful QPRT: To succeed, you must have
all your QPRT ducks in a row-not a simple task considering that many
different professionals are involved. Unless you have expressly confirmed that
one professional is “honcho’ing” the plan, make sure you have all the following
documents and steps addressed. Too often taxpayers try to address many of these
steps to control professional fees and the steps are ignored or only partially
completed, undermining the objectives:

• Trust Agreement: Be sure you have a signed original of the QPRT
  agreement. The agreement should be dated (too often trustees fail to fill
  in the date in the blank provided). Signatures should be witnessed and/or
  notarized as required in the document. The house to be transferred to the
  trust should be indicated in the trust or an attached schedule. In many
  plans there may be two QPRT agreements as ½ of the house is often
  transferred to a QPRT for the husband, and ½ to a QPRT for the wife. If
  there are any questions on these items contact your estate planning
  attorney.
• Tax Identification Number: A trust must have its own tax id number
  (also called an Employer Identification Number) issued by the IRS. This
  number serves the same function as a social security number for a
  person-the IRS uses the number to identify taxpayers that are required to
  file various business tax returns. A copy of the IRS documentation
  assigning the number should be saved. If you cannot find the information,
  call your accountant.
• Deed: You should have an original deed that reflects the stamp of the
  local recording office (e.g. the County Clerk) and the book and page number
  where recorded. The deed should be consistent with the manner in which the
  QPRT trust agreement was structured. So, if you and your spouse owned the
  house jointly as tenants by the entirety (which is common) but each plan to
  transfer ½ the house to your respective QPRTs, then you should first have a
  deed transferring the property from the two of you as husband and wife
  (i.e., tenants by the entirety) to the two of you as tenants in common (so
  that you each own a divisible half interest to transfer). After the date
  that deed is recorded you should have a second deed recorded from each of
  you to your respective QPRTs. The date on the deeds to the QPRT and their
  recording should be after the dates on the deed changing the title to
  tenants in common. The deeds transferring the house into the QPRTs should
  ideally be dated the same date as the QPRT. If you are missing any of these
  items contact your real estate attorney or estate planner (depending on who
  prepared the deeds).
• Appraisal: An appraisal confirming the value of the house when given to
  the trust, and any discounts if less than 100% was given, is essential. If
  you cannot find a copy, contact the appraiser used to obtain one.
• Gift Tax Return: A gift tax return should have been filed reporting the
  gift of the house to the trust. If you have a complete copy of the filed
  return, it may have many of the other documents and information attached
  (deed, appraisal, basis calculation, etc.). If a gift tax return was not
  filed, or if you’re not sure, call your accountant or estate planner
  (depending on who prepared the return).

  NOTE: If you already deeded your
  house into a QPRT and failed to file a gift-tax return, do not ignore this
  oversight! The IRS will eventually find out and they will be much more
  forgiving if you approach them with a mistake then if you wait for them to
  find it.

• Income Tax Return: Some accountants file a Form 1041 trust income tax
  return with an attached statement indicating that the QPRT is a “grantor
  trust” and that all deductions (there should be no income unless it was
  converted to a QAT on the sale of the house) are reported on your personal
  return. If an income tax return was not filed, or if you’re not sure, call
  your accountant.
• Insurance: Your property and casualty insurance, and title insurance,
  should all be updated to reflect the QPRT as owner, and it should also list
  the trustees as insured. If you’re not certain, call your insurance
  agent.
• Mortgage: If there is, or was, a mortgage or home equity line of
  credit, a copy of the mortgage or line, and the documents and steps taken
  to address it in the context of the QPRT should be saved. Payment of
  principal on your home mortgage made by you as an individual would
  constitute additional gifts to the QPRT each time you make a payment.
  Different estate planners address this issue in different ways (the
  simplest being to pay off any mortgages before the transfer to the QPRT).
  The documents confirming how you implemented this plan should be saved. If
  you’re not clear and had a mortgage, contact your accountant and estate
  planner.