The Qualified Private Residence Trust, or QPRT, became well-known a few
decades ago as a strategy to save gift and estate taxes. Now that many from the earlier trusts are expiring, families need to proceed very carefully to protect their tax benefits.Let's take, as an example, the situation of a man known as Brian. In August 1997, Brian met with his estate organizing lawyer. Due to the fact he was a widower using a net worth of $3 million at that time, and only a $600,000 federal unified gift and estate tax exemption, the attorney convinced him to transfer his $1 million residence into an irrevocable trust (a QPRT) using a 15-year term. Through the next 15 years, Brian continued to live in his residence rent-free, and assuming he was nevertheless living at the end of the term, ownership with the property would then transfer to his youngsters.Because Brian gifted a future interest in the property to his youngsters, the Internal Revenue Service granted him a valuation discount for the value in the interest he retained in the property. If he had died before the end of the QPRT term, the residence and any other assets in the trust would have reverted back to his estate, basically canceling the trust without realizing any tax savings. The IRS also granted Brian an extra valuation discount for the possibility of this reversion.
These valuation discounts were calculated according to Brian's age, the IRS-approved Section 7520 applicable federal rate of interest in the time he developed the trust, and the length in the QPRT term.Due to these valuation discounts, the value of Brian's gift was only about $460,000 for federal gift tax purposes, although his home was worth $1 million. Because the worth of the gift was below Brian's $600,000 lifetime exemption, he owed no gift tax upon generating and funding the QPRT. Thus, the QPRT supplied the possible for substantial gift and estate tax savings, not just on the value from the property at the trust's creation but also on any future residence appreciation thereafter.Fast-forward virtually 15 years - 14 years and eight months, to become exact. Inside 4 months, the QPRT term will end. Brian is presently in excellent wellness; his house has a current fair market worth of $2 million; and his net worth excluding the worth of the residence is now $4.65 million.