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Sunday, April 28, 2024
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Case Studies |
A QPRT with a Charitable Twist
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Case:
David Adams, age 65, owns five acres of woodland property located in the nearby mountains. On this property he has built a vacation home that he and his spouse use a number of times throughout the year. Also, for certain periods during the year, he permits his two sons and their families to use the home rent-free. It has become a favorite vacation spot for them since the property is right on a lake, has its own boat dock and is an excellent "fishing hole." The vacation home also includes a separate apartment that he rents to various friends.
David is remarried, having lost his first spouse to a massive stroke 10 years ago. His current spouse, Quinn, age 63, enjoys their times at the vacation home tremendously. Quinn has decorated the home and has done an exquisite job of making this home a joy to visit. Since Quinn loves the home, David would like to make sure when he passes away that Quinn will have the opportunity remain in the home. Also, he would like to make sure that his sons are given the opportunity to have use of the property (at least for a period of time) after both he and Quinn are gone.
David has been a philanthropist throughout his life and has been discussing a major gift with the Director of Estate Planning, Barbara Bailey, at his favorite charity, whose primary mission is to work with troubled teens. He has been making annual gifts of stock over the past few years, but their recent discussions have centered on a major testamentary gift. The vacation property is currently valued at $500,000 and is expected to increase in value substantially over the years. Lakefront property in this area is becoming more and more in demand, resulting in increased values especially over the last four or five years.
Question:
David would like to use the vacation property to make the eventual testamentary gift to charity. He feels that this property would be an excellent location for retreats and getaways for troubled teens. However, David would like Quinn to have use of the property during life. After Quinn is gone, he would like his sons to have use of the property for a period of time - probably about 10 years. Is there a way to structure a gift to the charity to "make all this work?"
Solution:
Barbara stated that there is a way to structure this gift using a noncharitable planning technique referred to as a qualified personal residence trust (QPRT) as set forth in Reg. 25-2702-5(c). This technique allows a parent to transfer his/her personal residence (or a vacation home) to children at a gift tax cost that is significantly lower than the estate tax cost if the residence were left to them in a will. The way this works is that the owner transfers the residence to a trust and retains the right to live in the residence without payment of rent for a period of time. At the end of the period, the residence either passes outright to the beneficiaries designated by the parent (usually the family) or continues in trust for their benefit.
When the parent transfers the residence (or vacation home) to the QPRT, he/she is treated as having made a gift to the children who will receive the residence when the retained interest terminates. The value of the gift to the children is the fair market value of the residence, reduced by the present value of the parent's retained interest (the right to live in the residence rent free for the specified period of time). This results in a high discount for gift tax purposes. However, the trust property (residence) will be included in the parent's estate if he/she dies during the trust term. As stated, when the retained interest terminates, the residence passes to the family members free of additional gift tax, even if it has appreciated since the trust was created.
Barbara went on to say that in David's case, the vacation home could be transferred to a QPRT that would end on (i) the end of a specified number of years or (ii) the date of David's death, whichever is sooner. If David survives the trust term, the property won't be included in his estate. At the end of that term, the vacation home in the QPRT would then pass to a family trust for the lifetime benefit of Quinn. Under the terms of the family trust, Quinn will be entitled to the use and occupancy of the property for her remaining lifetime. On her death, the vacation home will continue to be held in trust for the benefit of David's sons for a period of 10 years. Then, after the final 10-year term, the vacation home will pass to the charity.
There are a number of advantages to this gift scenario. Since this trust satisfies the requirements of a QPRT, the transfer of the vacation property to the trust will be completed with substantially reduced gift tax consequences. David's goals of life use for his spouse and a subsequent term use of the property by his sons will be realized. Finally, the vacation property will eventually pass to the charity as he desired.
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