Advantages and Disadvantages of a Qualified Personal Residence Trust Essay.
Our writers will deliver plagiarism-free paper on this assignment. Order now!
The paper must be suitable for submission to a high quality professional tax journal and cover relevant generation-skipping transfer tax issues and any relevant income tax issues.
Here’s a snippet of the essay.
A Qualified Personal Residence Trust (QPRT) is special type of a grantor trust with rules for estate and gift tax purposes that was introduced by the Congress in 1990. It was intended to ensure that a family residence could be passed to the subsequent heirs without forcing the sale of the residence to pay estate taxes. It has been adopted as a generous opportunity for individual seeking to foot down the impact of estate taxes on heirs by giving out their residences to the heirs before dying. It is usually an irrevocable trust made by the donor. When the QPRT is being created, it is funded with the donor’s interest for owning a personal residence. A QPRT may have so many advantages as well as disadvantages; however, in order for us to understand these merits and demerits, it is important that we first look at the key terms, and the basic idea of how a QPRT works.
Under the concept of QPRT, the settlor is a person owning the residence at the beginning, and who creates the trust then reserves to stay in the house for a stipulated period of time. The interest acquired through the trust is referred to as the retained interest since it is what is retained by the settlor. After the expiry of the specified period of time, the ownership of the residence shifts to the beneficiary. This interest is in turn referred to as the remainder interest (Bassing, 2009).
The Basic Idea
A QPRT becomes very useful in the event that the settlor wishes to transfer personal residence to a family member sometime in the future. This reduces the collective tax cost for the transfer. The purposes of gift taxes, the initial transfer is taken to be a gift of the remainder for the beneficiaries and this necessitates that the settlor files a gift tax return when the residence is transferred to the trust. The value of the remainder may be calculated by first establishing the current market value of the property, then deducting the value of the retained interest. The value of the retained interest is derived from the length of the trust term calculated in reference to the interest rates developed by the IRS for making current value calculations. The value of the retained interest increases with the length of the term of the trust. The lower the value of the remainder, the smaller the tax derived from the gift. The gift tax due is usually offset by the settlor’s unified credit which is an equivalent of the tax on a gift worth $1 million; this way, there is no payment made out of pocket, however, the settlor’s credit will obviously be reduced. A fractional interest of the home may be given to the QPRT in case the value of the home, applicable interest rates, and the term of the trust amount to a taxable gift exceeding lifetime transfer exclusion (Bassing, 2009).
In case of the death of the settlor before the termination of the term, the residence is automatically included in their taxable estate, and in return, estate fee is paid on it since the property was retained for a term that did not end. This means that the purpose of the trust has been defeated. However, if the settlor does not pass on before the expiry of the trust term, the ownership will be transferred to the heirs without tax transfer. As we have said before, when a trust term is comparatively long, the value of the gift gets relatively low, and the gift tax cost of transferring the property to the trust will be low. In contrast, if the trust term is comparatively short, it increases the value of the gift to the remainder, and in correspondence, and the gift tax for transferring the property will be high. However, the trust has to bear the risk if they choose a longer trust term since the residence may be counted in the settlor’s gross estate in case of demise before the trust term expires. In theory, a QPRT enjoys the highest tax transfer savings with young settlors as and long trust terms as opposed to elderly settlors who pose a risk of death before the trust term is expired (Ibid).