Personal Finance

bc · Guest

Counsel has suggested Client establish a QPRT (2 QPRTs?). I
am trying to get my arms around the various consequences to
make an informed response to Client, which won't make me
look stupid when counsel tells her "you've got to be
kidding".

Client situation: Client is married, with children from
first marriage. First husband divorced many years. Daughters
are adult. Client's second husband has been diagnosed with
ALS. Client and husband are in mid 50s. Client has
prenuptial with husband, due to "significant" assets from
first marriage. Husband has just about nothing. Client owns
two houses. One is residence, other is vacation home in
another state. Client states current assets worth about $3m,
including both houses.

As I understand it, a QPRT consists of three phases or tax
consequential terms. The first period is the year of
establishment. In that year, Client would be treated as
making a gift to beneficiaries of QPRT in amount of
discounted value of house, based on term of trust.

During the term of the trust, Client would make any mortgage
payments, as well as any real estate tax assessments,
insurance premiums, repairs and maintenance. Client would be
allowed the appropriate deductions on Schedule A of her
1040. If Client were to die during the term, the property
would revert to her estate and the gift tax return filed at
commencement of the trust would be void. (Unless trust
terminates on earlier of term or death.)

Upon completion of the term of the trust, the property is
distributed to the beneficiaries, who may do with the
property as they wish, including renting it to Client for
current fair value.

Issues: Client may only have one QPRT, even if she owns two
houses, and QPRT may only have one property therein.

If Client outlives term, beneficiaries will have rent income
for excess of current fair value over expenses incurred and
paid. If Client does not actually pay rent, beneficiaries
have made a gift (assumes daughters are beneficiaries, and
therefore related party rules apply).

I read in some of my materials that, when a QPRT for a term
of years terminates, the property may be held in a grantor
trust so that income tax free rent may be paid to the
children. I can't sort out how that would work. It seems to
me the trust makes no profit, the trust pays tax on its
profit, the trust passes the income out and the
beneficiaries pay tax, or the trust is a true grantor trust
and the grantors (the original beneficiaries) pay tax on the
net rental income.

If Client outlives term, have frozen estate inclusion at
discounted value of house in past. Future appreciation after
formation, and balance of discounted value of house, are
both excluded from Client's taxable estate.

If Congress changes estate tax rules before end of term,
Client is out of luck.

Does that about cover the salient features?

--
Bruce Davidson Cantor, CPA, JD
Admitted in Colorado

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