Why QPRTs Are the Ideal Estate Tax Shelter
Limitations of This Book
How to Use this Book
Terminology
Book Updates; Forms
Acknowledgments
Kleinrock’s

1.1 How to Save $1 Million of Estate Tax on a $1 Million Asset

• 1.1.01 The story of Jeanette and her $1 million condo
• 1.1.02 The QPRT valuation discounts
• 1.1.03 Using life insurance to complement the QPRT
• 1.1.04 What a qualified personal residence trust (QPRT) is
• 1.1.05 The ideal QPRT client (and who should avoid QPRTs)
• 1.1.06 The older the client is, the better
• 1.1.07 The wealthier the client is, the better
• 1.1.08 Only for clients seeking to benefit their descendants
• 1.1.09 Importance of donor’s reasonably good health
• 1.1.10 Donor expects to remain in his valuable residence
• 1.1.11 Drawbacks and limitations of the QPRT
• 1.1.12 Impact of future estate tax repeal and reinstatement

1.2 History: from GRITs to PRTs and QPRTs

• 1.2.01 QPRT’s ancestor: the GRIT
• 1.2.02 Special valuation rules of § 2702 (almost) kill GRITs
• 1.2.03 IRS regulation “interprets” § 2702
• 1.2.04 The Personal Residence Trust (PRT)
• 1.2.05 The Qualified Personal Residence Trust (QPRT)

1.3 Transfer Tax Fictions and How QPRTs Exploit Them

• 1.3.01 The transfer tax system and its necessary fictions
• 1.3.02 Fair market value fiction
• 1.3.03 Discounting to present value: the time value of money
• 1.3.04 The § 7520 rate fiction
• 1.3.05 Effect of high or low § 7520 rate on QPRTs
• 1.3.06 The fiction of constant asset value
• 1.3.07 Valuing interests with actuarial contingencies
• 1.3.08 Average life expectancy fiction
• 1.3.09 Science fiction: the discount for probability of survival

1.4 Alternatives to a QPRT

• 1.4.01 Grantor retained annuity trusts (GRATs)
• 1.4.02 GRATs, QPRTs, the residence; how to choose
• 1.4.03 Gifts of fractional interests; valuation discounts
• 1.4.04 Gifts using entities such as limited partnerships
• 1.4.05 Split purchase of life estate and remainder
• 1.4.06 “Freezing” value with a sale to a grantor trust

2.1 Definition of “Donor’s Personal Residence”

• 2.1.01 The big two “primary use” tests
• 2.1.02 The principal residence: § 1034
• 2.1.03 An “other” (nonprincipal) residence: § 280A(d)(1)
• 2.1.04 What structures, interests, qualify as “residences?”
• 2.1.05 Numerical limits on residences in QPRTs
• 2.1.06 Co-op form of ownership
• 2.1.07 Foreign residence
• 2.1.08 Continuing care arrangements; timeshares

2.2 Occupancy Tests: Who Must, May, May Not Use the Residence

• 2.2.01 Occupancy shared with family, guests, staff
• 2.2.02 Occupancy shared with paying tenants
• 2.2.03 If others (paying or not) occupy in donor’s absence
• 2.2.04 Residence held for donor’s use: nursing home problem
• 2.2.05 Definition of “dependent”

2.3 Gifts of Fractional Interests in Residence

• 2.3.01 Regulation permits QPRT for fractional interest
• 2.3.02 Shared occupancy issues raised by co-ownership
• 2.3.03 Advantage: gift tax valuation discounts
• 2.3.04 Multiple QPRTs with different expiration dates
• 2.3.05 Spouses create separate QPRTs for same residence
• 2.3.06 To give donor’s children independent occupancy rights
• 2.3.07 Donor owns the portion not owned by the QPRT
• 2.3.08 Who should use, not use, fractional-interest QPRTs

2.4 Property with Some Nonresidential Use

• 2.4.01 Transient lodging with services: bed-and-breakfast
• 2.4.02 Home office, day care center examples
• 2.4.03 Other commercial or nonresidential use
• 2.4.04 Easements for conservation, historic preservation

2.5 ...And Nothing but the Residence!

• 2.5.01 Fixtures ok, furnishings not ok
• 2.5.02 “Adjacent land”: Larger acreage
• 2.5.03 “Adjacent land”: multiple lots
• 2.5.04 Appurtenant structures

2.6 Financial, Legal, Personal, and Tax Factors

• 2.6.01 Residence has low value or low income tax basis
• 2.6.02 Local law: perquisites, restrictions, transfer costs
• 2.6.03 Title and homeowner’s insurance issues

2.7 If Residence Is Subject to a Mortgage

• 2.7.01 The problem with a mortgage on a QPRT residence
• 2.7.02 Best solutions: pay off mortgage; interest only loan
• 2.7.03 Treat donor’s mortgage payments as loan to trust
• 2.7.04 Workable if tweaked: each beneficiary pays his share
• 2.7.05 Doubtful but popular: donor promises to pay mortgage
• 2.7.06 Due-on-sale clause; income tax considerations

3.1 Setting QPRT Term and Donor’s Reversion

• 3.1.01 The two phases of the QPRT term: QPRT and GRAT
• 3.1.02 How long can the QPRT term be?
• 3.1.03 Which is better, a short term or a long one?
• 3.1.04 Expert tips on how to set the QPRT term
• 3.1.05 Donor’s death during term; retaining a reversion
• 3.1.06 Reasons not to retain a reversion
• 3.1.07 What rights or powers constitute a “reversion?”
• 3.1.08 Options for disposition on donor’s death during term

3.2 IRS Rules on Provisions During Term

• 3.2.01 Summary of required and permitted provisions
• 3.2.02 QPRT may hold cash for certain expenditures
• 3.2.03 Allowing trust to divide into multiple trusts
• 3.2.04 Sale of residence by the QPRT; sale proceeds
• 3.2.05 Insurance policies, proceeds; condemnation awards
• 3.2.06 Commutations prohibited
• 3.2.07 Sale of residence to donor, spouse, prohibited

3.3 Cessation of QPRT Status During Term

• 3.3.01 When “QPRT status” ends: sale of residence
• 3.3.02 Cessation of QPRT status: casualty, condemnation
• 3.3.03 Cessation of QPRT status: other reasons
• 3.3.04 Three options upon cessation of QPRT status
• 3.3.05 Options 1 and 3 precluded if the donor is the trustee
• 3.3.06 Option 2 is best even if the donor is not the trustee

3.4 Conversion to a GRAT

• 3.4.01 When the annuity payments begin
• 3.4.02 Interest and income during annuity deferral period
• 3.4.03 Other required GRAT provisions
• 3.4.04 Making GRAT distributions in kind
• 3.4.05 Language attempting to limit estate inclusion
• 3.4.06 Multiple GRAT conversions in one QPRT

3.5 Other Drafting Issues for the QPRT Term

• 3.5.01 Donor as trustee: during QPRT term
• 3.5.02 Allocation of expenditures to income or principal
• 3.5.03 If all non-skip beneficiaries or issue die during term
• 3.5.04 Spendthrift provision; preserving “amendability”
• 3.5.05 Other ways to preserve “amendability”
• 3.5.06 Provisions anticipating estate tax repeal
• 3.5.07 Holding title in a nominee trust or other nominee

3.6 Provisions During Life of Donor’s Spouse

• 3.6.01 After term, keep property out of parents’ estates
• 3.6.02 Reasons to benefit spouse; but which spouse?
• 3.6.03 Give spouse a life estate in the trust
• 3.6.04 Drafting issues when giving spouse a life estate
• 3.6.05 Spray trust for spouse and issue
• 3.6.06 Giving spouse power to change disposition: overview
• 3.6.07 Income to donor via exercise of power
• 3.6.08 Income or use to donor upon lapse of power
• 3.6.09 Do not give spouse a general power of appointment
• 3.6.10 Give no one power to appoint principal to donor
• 3.6.11 Spousal power to appoint to persons other than donor

3.7 Donor’s Life after QPRT Term

• 3.7.01 Donor leases residence or retains right to do so
• 3.7.02 Should property pass outright to children or in trust?
• 3.7.03 Choices for dispositive provisions of ongoing trust
• 3.7.04 Default of issue after QPRT term
• 3.7.05 Choice of trustee after QPRT term; § 2036–§ 2038
• 3.7.06 Donor retains option to buy, veto, or first refusal

4.1 Gift and Estate Tax Essentials

• 4.1.01 The “unified” tax on lifetime and at-death transfers
• 4.1.02 How the gift tax works
• 4.1.03 How the estate tax works
• 4.1.04 How Code avoids double tax on estate-included gifts

4.2 QPRT Computations

• 4.2.01 Subtraction method replaces “fair market value”
• 4.2.02 Information needed and where to find it
• 4.2.03 How to calculate the QPRT gift value
• 4.2.04 Calculation of GRAT payments (total conversion)
• 4.2.05 Can the GRAT conversion itself constitute a gift?
• 4.2.06 Calculation of GRAT payments: partial conversion

4.3 Various Gift Tax Issues

• 4.3.01 Gift tax return: due date, how to report QPRT gift
• 4.3.02 Marital deduction, annual exclusions do not apply
• 4.3.03 Gift tax statute of limitations
• 4.3.04 Donor’s payment of expenses during the QPRT term
• 4.3.05 Improvements; additional gifts during QPRT term

4.4 Additional Issues for Married Donors

• 4.4.01 Married U.S. donors allowed to “split” some gifts
• 4.4.02 Why spouses should not split QPRT gifts
• 4.4.03 Couple must split all qualifying gifts or none
• 4.4.04 Make QPRT not qualify for splitting? Life insurance?
• 4.4.05 When the residence is jointly owned
• 4.4.06 Who is the donor? “Step transaction” problems
• 4.4.07 Simultaneous QPRTs and “reciprocal trust” doctrine
• 4.4.08 § 2036 and spousal joint tenancy
• 4.4.09 Which spouse should create the QPRT?

4.5 Creditors’ Rights and the Estate Tax

• 4.5.01 Assets reachable by donor’s creditors: estate tax effect
• 4.5.02 Basic effects of this rule on QPRTs
• 4.5.03 Creditors can probably force GRAT conversion
• 4.5.04 Application to PRTs

4.6 Other Estate Tax Issues

• 4.6.01 Estate inclusion if donor dies during the term
• 4.6.02 Estate tax apportionment if donor dies during term
• 4.6.03 Limiting estate inclusion after GRAT conversion
• 4.6.04 Donor’s rent-free use causes estate inclusion

5.1 Generation-skipping Transfer Tax Essentials

• 5.1.01 Overview of the GST tax
• 5.1.02 Which gifts, bequests, trust events, are GST-taxable
• 5.1.03 Exceptions: annual gifts; medical, tuition expenses
• 5.1.04 The “deceased parent” exception
• 5.1.05 The GST exemption and how it gets allocated
• 5.1.06 Illustration of allocating GST exemption to a trust
• 5.1.07 Effect of timely, late, allocation of GST exemption
• 5.1.08 How GST exemption affects trust: the inclusion ratio
• 5.1.09 Planning techniques for the GST tax
• 5.1.10 Avoid inclusion ratios between zero and one
• 5.1.11 How to avoid partial inclusion ratios

5.2 The QPRT-GST Tax Dilemma

• 5.2.01 ETIP rule: No exemption allocation until end of term
• 5.2.02 QPRTs and the deceased parent exception
• 5.2.03 Retroactive allocation rule does not help
• 5.2.04 Fixing a QPRT left to “issue”
• 5.2.05 How to (and how not to) solve QPRT-GST puzzle
• 5.2.06 Who uses/should use which QPRT-GST Approach?
• 5.2.07 Three issues that arise with all four Approaches

5.3 Approach #1: Spray Trust for Issue

• 5.3.01 QPRT remainder passes to “spray” trust, if necessary
• 5.3.02 Risks, limitations, and drawbacks of Approach #1

5.4 Approach #2: Leave to Living Children Only

• 5.4.01 Leave QPRT only to non-skip persons
• 5.4.02 Drawback: how compensate issue of deceased child?
• 5.4.03 Drawback: what happens if all children die

5.5 Approach #3: Force Share into Child’s Estate

• 5.5.01 Force asset into gross estate of deceased child
• 5.5.02 Changing the “transferor” for GST tax purposes
• 5.5.03 Risks, limitations, and drawbacks of Approach #3
• 5.5.04 Provide that child’s share passes to his estate?
• 5.5.05 Give child a general power of appointment?

5.6 Approach #4: Separate Share for Each Child

• 5.6.01 Create separate shares, one for each child
• 5.6.02 The separate and independent share rule
• 5.6.03 Risks and drawbacks of Approach #4

5.7 Automatic Allocations; EGTRRA Sunset

• 5.7.01 Automatic GST exemption allocation rules
• 5.7.02 Automatic allocation at end of QPRT term-ETIP
• 5.7.03 Automatic allocation rules affect pre-existing QPRTs
• 5.7.04 Effect of GST tax repeal, EGTRRA sunset provisions

6.1 Grantor Trust Status

• 6.1.01 Grantor trust rule essentials
• 6.1.02 Transactions between grantor and grantor trust
• 6.1.03 Advantage of grantor trust status: during QPRT term
• 6.1.04 How to assure grantor trust status during QPRT term
• 6.1.05 Grantor trust status: after the term ends
• 6.1.06 Income tax reimbursement language
• 6.1.07 Risks: legislative change, “abuse” provisions
• 6.1.08 Gain realized on termination of grantor trust status?

6.2 Income Tax Reporting Requirements

• 6.2.01 Grantor reports income and deductions on his 1040
• 6.2.02 Trust’s reporting requirements
• 6.2.03 Best method: No trust return
• 6.2.04 Traditional method: Form 1041 plus statement
• 6.2.05 Worst method: reporting on Form 1099
• 6.2.06 Changing methods; year of grantor’s death; penalties
• 6.2.07 Does a QPRT need a TIN?

6.3 Other Income Tax Issues

• 6.3.01 Income tax basis, rental income, depreciation
• 6.3.02 Fractionalization of basis does not apply
• 6.3.03 Drawback of giving low basis property
• 6.3.04 Exclusion of gain on sale of principal residence
• 6.3.05 § 121 after donor’s death: surviving spouse
• 6.3.06 § 121 after donor’s death: in year 2010

7.1 Ways to Undo a QPRT Gift

• 7.1.01 Reforming a QPRT
• 7.1.02 Qualified disclaimer to reverse QPRT gift
• 7.1.03 Donor’s poor health: gift or sale of retained interests
• 7.1.04 Donor’s poor health: commutation of trust interests
• 7.1.05 Donor remarries
• 7.1.06 Decline in donor’s financial circumstances

7.2 Various Transactions During the QPRT Term

• 7.2.01 Renting the residence to others
• 7.2.02 Improvements to the residence
• 7.2.03 Selling the residence and buying a new one
• 7.2.04 Donor buys residence back from the QPRT
• 7.2.05 Mortgaging the residence (or borrowing unsecured)
• 7.2.06 Sell residence, convert to a GRAT

7.3 Various Transactions: After the Term

• 7.3.01 Donor buys house back after term
• 7.3.02 Donor rents house back after term
• 7.3.03 If the donor does not want to (or cannot) pay the rent

8.1 Wendy Wigglesworth: Wealthy Widow

• 8.1.01 Widow with four children, one house, lots of cash
• 8.1.02 Why a QPRT appeals to Wendy Wigglesworth
• 8.1.03 QPRT for the principal residence
• 8.1.04 Example of equalizing clause in will

8.2 The Tutwilers: Married Donors

• 8.2.01 Married couple, three residences, one an heirloom
• 8.2.02 Tina’s QPRT for the heirloom home
• 8.2.03 Matching spousal QPRTs for the principal residence
• 8.2.04 Tom’s QPRT for the Florida condo

8.3 The Ponds: Only Child

• 8.3.01 A QPRT for an only child

Appendix A: QPRT Resources

Appendix B: Forms

Form 1: Sample Qualified Personal Residence Trust
Form 2: Summary of Qualified Personal Residence Trust
Form 3: Sample Statement to Attach to Gift Tax Return

Appendix C: QPRT Private Letter Rulings

Appendix D: QPRT Drafting Checklist