Tansey Estate Planning

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Qualified Personal Residence Trust

A Qualified Personal Residence Trust (“QPRT”) is a Split-Interest Trust where the Settlor transfers a residence to a trust which gives the Settlor the right to live in his or her residence for a period of years (“Initial Term”). After the Initial Term the residence is transferred to a third party Remainder Beneficiary (which could be another trust) and then the Settlor would have to pay fair market rent to live in the residence. The property transferred to a QPRT must be a residence. For example, if the Settlor owned a farm with a residence, only the residence portion could be transferred to a QPRT. An individual is limited to creating two QPRTs. The gift value of property transferred to a QPRT is the value of the Remainder Interest after the Initial Term. The Transfer Tax efficiency of a QPRT is enhanced with (i) a high AFR, and (ii) older transferors (relative to younger transferors). The Settlor must survive the Initial Term in order to accomplish the tax efficient transfer with a QPRT. Generally, the Settlor is in no worse of a financial condition if he or she were to fail to outlive the Initial Term (except for the initial set-up costs). A QPRT may sell a residence that it owns and replace it with another residence. If the QPRT were to sell the residence without using the proceeds to purchase a replacement residence, the QPRT will convert to a GRAT. One should note that there is an adverse income tax consequence associated with the use of a QPRT: upon one’s death, the residence will not benefit from a Step-Up in Basis for income tax purposes. The QPRT uses the Advanced Estate Planning Principle of Post Transaction Appreciation.