Friday March 29, 2024

3.7.5 Life Estate vs. Qualified Personal Residence Trust (QPRT)

Life Estate vs. QPRT

Life Estate Remainder to Charity:   The life estate with remainder to charity is created by deeding the remainder interest to a qualified exempt charity and retaining the right to use the residence for a life, lives or a term of years.

Qualified Personal Residence Trust:   A qualified personal residence trust is used to transfer a personal residence to family with substantially reduced gift tax consequences.

There are two agreements that both involve a life estate. A life estate with remainder to charity is normally created for one or two lives. However, it may be created for a term of years. Alternatively, it is possible to create a qualified personal residence trust (QPRT) and to create a life estate agreement for a term of years with a remainder to family.

Life Estate Remainder to Charity

The life estate with remainder to charity is created by deeding the remainder interest to a qualified exempt charity and retaining the right to use the residence for a life, lives or a term of years. The initial gift qualifies for an income tax deduction, and the eventual transfer to charity will qualify for an estate tax deduction.

Qualified Personal Residence Trust

A qualified personal residence trust is used to transfer a personal residence to family with substantially reduced gift tax consequences. The QPRT may be used for up to two residences. The residence and up to six months of cash to be used for improvements to the residence may be held in the QPRT. Reg. 25.2702-5(c)(5)(ii). The QPRT is normally for the lesser of a term of years or one or two lives. If the donor or donor couple pass away prior to the expiration of the term of years, the property will revert to the estate. However, if they survive to the expiration of the term of years, the property will belong to the children. If the property ceases to be used as a personal residence, it is permissible to convert the QPRT to an annuity. Reg. 25.2702-5(c)(8)(ii).

Example 3.7.5A

John and Susan Smith are ages 71 and 74. They have a $400,000 home and transfer that property into a qualified personal residence trust (QPRT) for a term of the lesser of 10 years or their two lives. Based upon the Applicable Federal Rate (AFR) and their ages, the present value of the gift is $205,753. If they live in their home and survive for 10 years, the $400,000 home plus appreciation will be transferred to children for the use of $205,753 of their gift exemptions.

Case Studies on Life Estate vs. Qualified Personal Residence Trust (QPRT)

A QPRT with a Charitable Twist:   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.

Private Letter Rulings

PLR 200840038 Sale of Remainder Interest:   On Date 1, Husband and Wife (H and W) created an irrevocable trust (Purchasing Trust) with an independent Trustee for the benefit of their issue. Purchasing Trust terms permit Trustee to add any charitable organization as a beneficiary during H and W's lifetimes.


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