Lesson 36: Example: Transferring a $5M Primary Residence to a Qualified Personal Residence Trust (QPRT)

As part of our ongoing exploration into advanced estate planning techniques for ultra-wealthy clients, this lesson delves into the mechanics and benefits of transferring a high-value primary residence into a Qualified Personal Residence Trust (QPRT).

Introduction to QPRTs

A Qualified Personal Residence Trust (QPRT) is an irrevocable trust designed to remove the value of a primary or secondary residence from the grantor's estate, while allowing the grantor to continue living in the residence for a predetermined term. At the end of the term, the residence passes to beneficiaries, typically the grantor's children, potentially at a reduced gift tax value.

Step-by-Step Process

Let's explore how to transfer a $5M primary residence into a QPRT with a practical example:

Step 1: Establish the Trust

The first step involves creating the QPRT document. This legal document outlines the terms of the trust, including the length of the trust term, which is a critical factor in determining the value of the taxable gift.

Step 2: Transfer the Residence

Next, the grantor transfers the primary residence into the QPRT. This action triggers the start of the trust term, during which the grantor retains the right to live in the residence.

Step 3: Determine the Value of the Taxable Gift

The value of the taxable gift is calculated based on the current market value of the residence, adjusted for the grantor's retained interest during the trust term. This calculation uses actuarial tables and the Section 7520 rate.

Benefits and Considerations

Transferring a residence to a QPRT can significantly reduce estate taxes, but it requires careful planning and consideration of various factors, including the grantor's life expectancy and the potential appreciation of the property.

Diagram: QPRT Overview

Tax Calculations

The taxable gift value is computed using the following formula:

$$ G = P \times (1 - PV) $$
  
Where:
  G = Value of taxable gift
  P = Current market value of the property
  PV = Present value of the grantor's retained interest
  

Example Calculation

For illustration, let's assume the following parameters:

• Current market value of the residence: $5,000,000
• Trust term: 10 years
• Section 7520 rate: 1.2%

The present value of the grantor's retained interest (PV) can be calculated using actuarial tables available from the IRS. For simplicity, assume the PV is 0.75. For further reading, consider J.K. Lasser's Your Income Tax 2023.

Therefore, the taxable gift value would be $1,250,000.

Risks and Mitigation

While a QPRT offers significant tax advantages, there are inherent risks:

• The grantor must outlive the trust term, or the full value of the residence may revert to their estate.
• If the property appreciates significantly, the fixed trust term may not capture the full future value.

Example Timeline

Conclusion

By transferring a primary residence into a QPRT, ultra-wealthy clients can substantially reduce their estate tax liability while retaining the right to live in their home for a specified period. This strategy requires meticulous planning and a thorough understanding of the client's life expectancy and the property’s potential appreciation.

For further reading and examples, please refer to our other lessons:

• Identifying Potential Estate Tax Exposure
• Tradeoffs of Spousal Lifetime Access Trust (SLAT)
• Tradeoffs of Qualified Personal Residence Trust (QPRT)