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The QPRT Manual: Forms from Appendix B

This document contains the forms from Appendix B of The QPRT Manual, by Natalie B. Choate (Ataxplan Publications; 1st edition, 2004), in Microsoft Office Word 2003 format. Text material has been omitted. The borders that, in Appendix B, surround excerpts from the IRS Sample QPRT have been omitted here. The forms in Appendix B are formatted to fit the book’s page size, which is 6 inches by 9 inches. The forms in this document are formatted to standard 8.5 inch by 11 inch page size. Only the forms themselves, and instructions for using the forms, are contained in this document.  Bold text and [text in brackets] indicates instructions regarding the form, or variables that need to be inserted by the drafter, and are not part of the form.

CONTENTS

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

	Warning: Limited purpose of Forms
The forms in this document are intended solely as a convenience, to provide a competent estate planning lawyer with a starting point as he gets underway in preparing his client’s QPRT. These forms do NOT represent a fool-proof or guaranteed drafting system for the inexperienced attorney, and are NOT intended to relieve the drafter of the absolute necessity of reviewing every word of his document to make sure the trust complies with the QPRT regulation, carries out the client’s intent, conforms with applicable state law, and will not have unexpected legal or tax consequences.

Form 1: Sample Qualified Personal Residence Trust

Reminder: The following form is offered as a “sample” QPRT, not as a “master” QPRT form. There are so many variations possible in disposition of the QPRT remainder that it is not possible to cover them all in one form. The options in this form illustrate alternatives discussed in the text of The QPRT Manual but do not represent the only choices. 
Also, this sample QPRT contemplates a married QPRT donor who has two or more living children. It would require modification if used for an unmarried donor, to weed out unnecessary references to a spouse. It would also require modification for a donor who has only one child, since there are references to the donors “children” throughout. Finally, it would require substantial modification if used for a QPRT donor who has one or more children who are already deceased (leaving living issue) at the time the QPRT is created (see  5.2.07(A)).

List of variables to insert in Form 1

Here is a list of the variables that will be inserted in Form 1, and where they are used. Not every variable will be needed in every QPRT. 

[TRANSFEROR NAME] Name of the Transferor (the QPRT donor; the person contributing the residence to the QPRT). Opening paragraph, signature page.
[TRUST NAME] Name of the trust (e.g., “John Jones Residence” Trust, or “Mary Smith Boston Residence” Trust). Title, opening paragraph.
[TRUSTEE NAME] Name of the initial trustee (normally same as Transferor). Opening paragraph, signature page.
[DESCRIPTION OF RESIDENCE] Description of the residence being transferred to the QPRT. Include street address, town, county, and state, and any other details necessary to identify the property being conveyed to the QPRT. Article II(A)(1), Alts. 1 and 2. 
[FRACTION] Fractional interest being transferred to the QPRT, if applicable (e.g., “one-half”). Article II(A)(1), Alt. 2.
[NAMES OF TRANSFEROR’S CHILDREN] Names of the Transferor’s living children. Article IV(C).
[NUMBER OF YEARS OF QPRT TERM]. Article II(C), Alt. 2, Paragraph (C)(1).
[SPOUSE NAME] Name of Transferor’s spouse, if any. Article IV(C).
[STATE] The state whose governing law shall be used in the interpretation and administration of the trust (Article IV(B)), and in the determination of the Transferor’s “heirs at law” in case of a default of issue (“Article V for use with Approaches #1, #2, and #3,” Article V(C)).
[SUCCESSOR TRUSTEE NAME] Name of successor trustee. Article IV(F)(4).

See also Article II(C), Alt. 1, for additional variables if using the IRS version of Art. II(C).

[Title: Use for all QPRTs.]

	[TRUST NAME] TRUST

[Opening paragraph: Use for all QPRTs.]

This trust agreement is made this ______ day of ___________, 20 ______, by and between [TRANSFEROR NAME] (hereinafter “the Transferor”) and [TRUSTEE NAME] as the trustee (hereinafter “the Trustee”), hereby creating the [TRUST NAME] Trust.

ARTICLE I. RETAINED INTEREST AND IRREVOCABILITY

[Article I(A): Use for all QPRTs.]

A. RETAINED INTEREST. The Transferor intends to establish a qualified personal residence trust within the meaning of Rev. Proc. 2003-42, section 2702(a)(3)(A) of the Internal Revenue Code (hereinafter “the Code”), and section 25.2702-5(c) of the Gift Tax Regulations (hereinafter “the regulations”). Accordingly, the Transferor retains no right, title, or interest in any trust asset except as specifically provided in this trust instrument.

[Article I(B), Alt. 1: IRS version; no amendments allowed except to qualify as a QPRT.]

B. IRREVOCABLE. This trust is irrevocable and therefore may not be modified, amended, or revoked by the Transferor or any other person. Notwithstanding the preceding sentence, however, the Trustee shall have the power, acting alone, to amend the trust to the extent provided in section 25.2702-5(a)(2) of the regulations (or any subsequent regulation or statute) in any manner required for the sole purpose of ensuring that the trust qualifies as a qualified personal residence trust for purposes of section 2702(a)(3)(A) of the Code and section 25.2702-5(c) of the regulations (including with respect to the grantor retained annuity trust (“GRAT”) administered under Article III, the qualification of the annuity interest under section 2702(b)(1) of the Code and section 25.2702-3 of the regulations).

[Article I(B), Alt.2: Alternative version allowing more “amendability.” See  3.5.05.]

B. IRREVOCABILITY; AMENDMENTS. This trust is irrevocable and may not be modified, amended, or revoked by the Transferor or any other person, except as follows:
	
1.	The Trustee shall have the power, acting alone, to amend the trust to the extent provided in section 25.2702-5(a)(2) of the regulations (or any subsequent regulation or statute) in any manner required for the sole purpose of ensuring that the trust qualifies as a qualified personal residence trust for purposes of section 2702(a)(3)(A) of the Code and section 25.2702-5(c) of the regulations (including with respect to the grantor retained annuity trust (“GRAT”) administered under Article III, the qualification of the annuity interest under section 2702(b)(1) of the Code and section 25.2702-3 of the regulations).

2.	The Trustee (other than the Transferor, who shall have no such power) shall have the power, with the consent of the Current Beneficiaries other than the Transferor, to amend any provision of this trust, subject to the following two limitations. First, no such amendment may be made that would cause the trust to fail or cease to qualify as a qualified personal residence trust under section 2702(a)(3)(A) of the Code and section 25.2702-5(c) of the regulations (including with respect to the grantor retained annuity trust (“GRAT”) administered under Article III, the qualification of the annuity interest under section 2702(b)(1) of the Code and section 25.2702-3 of the regulations). Second, no such amendment may reduce, eliminate, or otherwise adversely affect any interest retained by the Transferor under this trust unless the Transferor consents to such amendment. Any purported amendment that would violate either of these two limitations shall be null and void.

ARTICLE II. QUALIFIED PERSONAL RESIDENCE TRUST

A. FUNDING OF THE QUALIFIED PERSONAL RESIDENCE TRUST (“QPRT”).

[Article II(A)(1), Alt. 1: IRS version; suitable when the entire residence is conveyed to the QPRT]

(1) RESIDENCE. The Transferor transfers and assigns to the Trustee all of the Transferor’s interests in and rights to certain real property, including all improvements thereon and appurtenances thereto, known as [DESCRIPTION OF RESIDENCE]. This property, or any property acquired as a replacement, will hereinafter be referred to as the “Residence.” The Trustee accepts the Residence and agrees to hold, manage, and distribute the Residence and any other trust property under the terms set forth in this instrument.

[Article II(A)(1), Alt. 2: Alternative version suitable when the QPRT is funded with an undivided fractional interest in the residence; see  2.3.]

(1) RESIDENCE. The Transferor transfers and assigns to the Trustee an undivided [FRACTION] interest as tenant in common in certain real property, including all improvements thereon and appurtenances thereto, known as [DESCRIPTION OF RESIDENCE]. This property, or any property acquired as a replacement, will hereinafter be referred to as the “Residence.” The Trustee accepts the Residence and agrees to hold, manage, and distribute the Residence and any other trust property under the terms set forth in this instrument.

[Article II(A)(1), Alt. 3: Another IRS versionto be used when the Transferor gives the QPRT cash to purchase the Residence rather than giving the Residence itself to the QPRT. See  3.2.02. Normally, the Transferor gives the trust the Residence itself, not cash to purchase the Residence; however, this version of Paragraph (1) could be used, with modifications, in case of a “split purchase” (see  1.4.05).]

(1) CASH FOR PURCHASE OF RESIDENCE. The Transferor transfers $________ to the Trustee and confirms that the Transferor intends to transfer to the Trustee additional cash in an amount sufficient to allow the Trustee to purchase a residence to be used as a personal residence of the Transferor. The Trustee accepts that amount, agrees to hold it in a separate account, and agrees to use it and any additional cash contributed under Subparagraph A(3)(d) of this Article to purchase, within 3 months after the date on which this trust is created, such a residence (hereinafter referred to as “the Residence”). The Trustee agrees to hold, manage, and distribute the Residence and any other trust property under the terms set forth in this instrument.

[Article II(A)(2); use this IRS-drafted Paragraph (2) for all QPRTs, and with all versions of Art. II(A)(1) and (A)(3). See  3.2.01(1) and  3.2.05.]

(2) ASSETS OF TRUST. Except as provided in Paragraphs A(3) and B(6), and Section D, of this Article II, the Trustee is prohibited from holding, at any time during the term of the QPRT, any property other than (a) an interest in one (and only one) Residence that meets the requirements of a personal residence of the Transferor as set forth in section 25.2702-5(c)(2) of the regulations, and (b) policies of insurance on the Residence.

[Article II(A)(3), Alt. 1: IRS version. Use this if the Residence itself is being transferred to the QPRT (which is usually the case). See Alt. 2 if cash is given to the QPRT to buy the Residence.]

(3) ADDITIONS TO QPRT. From time to time, the Trustee may accept an addition of cash to the QPRT in an amount which, when added to any cash already held, does not exceed the amount reasonably required for: (a) the payment of QPRT expenses (including without limitation mortgage payments) already incurred or reasonably expected to be paid by the trust within 6 months after the date the addition is made; (b) the cost of improvements to the Residence to be paid by the trust within 6 months after the date the addition is made; and (c) the purchase by the trust of a replacement Residence within 3 months after the date the addition is made, provided that no addition may be made, or held by the Trustee, for the purchase of a replacement Residence unless the Trustee has, prior to receipt of the addition, entered into a contract to purchase that Residence. The Trustee shall hold the additions of cash received in accordance with this paragraph in a separate account.

[Article II(A)(3), Alt. 2: Another IRS versionto be used when the Transferor initially gives the trust cash to purchase the Residence rather than giving the Residence itself to the QPRT; see  3.2.02. Modify as necessary if both the Transferor and the remainder beneficiary are contributing cash to the QPRT for a “split purchase” ( 1.4.05).]

(3) ADDITIONS TO QPRT. From time to time, the Trustee may accept an addition of cash to the QPRT in an amount which, when added to any cash already held, does not exceed the amount reasonably required for: (a) the payment of QPRT expenses (including without limitation mortgage payments) already incurred or reasonably expected to be paid by the trust within 6 months after the date the addition is made; (b) the cost of improvements to the Residence to be paid by the trust within 6 months after the date the addition is made; (c) the purchase by the trust of a replacement Residence within 3 months after the date the addition is made, provided that no addition may be made, or held by the Trustee, for this purpose unless the Trustee has, prior to receipt of the addition, entered into a contract to purchase that Residence; and (d) the purchase by the trust of the initial Residence within 3 months of the date the trust is created, provided that no addition may be made, or held by the Trustee, for the purchase of the initial Residence unless the Trustee has, prior to receipt of the addition, entered into a contract to purchase that Residence. The Trustee shall hold the additions of cash received in accordance with this paragraph in a separate account.

B. ADMINISTRATION OF TRUST.

[Article II(B)(1), Alt. 1: IRS version: This version is suitable if no part of the residence is ever to be rented out to anyone other than the Transferor. See  2.2. In this paragraph, the IRS’s wording “termination of the trust” has been changed to “termination of the QPRT” to be consistent with the terminology in the rest of the document. Also, if the QPRT owns only a fractional interest in the Residence (see  2.3), delete the word “exclusive” from the last sentence.]

(1) USE AND MANAGEMENT OF RESIDENCE. The Trustee shall hold and maintain the Residence as a personal residence of the Transferor during the period beginning on the date of creation of the trust and continuing through the date of termination of the QPRT (hereinafter “the term of the QPRT”). During the term of the QPRT, the Transferor shall have the exclusive rent-free use, possession, and enjoyment of the Residence.

[Article II(B)(1), Alt. 2: The IRS’s form does not recognize that the residence may be partly or wholly rented to others. The following alternative paragraph is suitable for use if part of the residence may be rented out to other parties, or if the entire residence is to be rented to other parties when not occupied by the donor. See  2.2. Under this form, rental to others requires the donor’s consent.]

(1) USE AND MANAGEMENT OF RESIDENCE. The Trustee shall hold and maintain the Residence as a personal residence of the Transferor during the period beginning on the date of creation of the trust and continuing through the date of expiration of the Transferor’s interest specified in Article II(C). Said period of time is herein referred to as “the term of the QPRT.” During the term of the QPRT, the Transferor shall have the exclusive rent-free use, possession, and enjoyment of the Residence, except that, with the Transferor’s consent, portions or all of the Residence may be rented out to or otherwise made available for occupancy by other parties, so long as the primary use of the property is (when occupied by the Transferor) as the Transferor’s personal residence and (when not occupied by the Transferor) not other than as a residence.

[Article II(B)(2): Use for all QPRTs; see  3.2.02.]

(2) PAYMENT OF EXPENSES. The Transferor shall be responsible for the payment of all costs associated with the Residence, including but not limited to mortgage payments, property taxes, utilities, repairs, maintenance, and insurance. The Trustee’s responsibility for the maintenance of the Residence and for other costs associated with the Residence is limited to the extent of any trust income and additions of cash for that purpose received by the Trustee in accordance with this Article II. If the Trustee has insufficient funds to pay these costs and expenses, the Trustee shall notify the Transferor, who shall be responsible for the unpaid balance of these costs and expenses. In addition, the Trustee from time to time may make improvements to the Residence, but the Trustee’s authority and responsibility to do so is limited to the extent of any trust income, insurance proceeds, and additions of cash for that purpose received by the Trustee in accordance with this Article II.

[Optional additional paragraph, to be included if the QPRT owns only a fractional interest in the residence. The IRS sample QPRT does not provide for a QPRT’s ownership of less than the entire fee interest in the residence. See  2.3.]

(2A) PRO-RATION IN CASE OF PARTIAL OWNERSHIP. Notwithstanding the foregoing, if the trust owns less than the entire fee interest in the Residence, then the Transferor’s rights and responsibilities shall be limited to be commensurate with such ownership status, so that, for example, the Transferor’s liability for expenses shall be limited to the share of such expenses properly allocable to the trust’s ownership interest in the Residence.

[Article II(B)(3): Use for all QPRTs; see  3.2.02.]

(3) DISTRIBUTIONS OF CASH TO TRANSFEROR. Any net income of the QPRT shall be distributed to the Transferor, not less frequently than annually. In addition, the Trustee shall determine, not less frequently than quarterly, whether the cash held by the QPRT exceeds the amount permitted to be held by the Trustee and shall immediately distribute the excess, if any, to the Transferor. Within 30 days of the date of the termination of the QPRT, the Trustee shall distribute outright to the Transferor (or to the estate of the Transferor, as the case may be), any amounts held by the QPRT pursuant to Paragraph A(3) of this Article II that are not used to pay QPRT expenses due and payable on the date of termination (including expenses directly related to the termination of the QPRT).

[Article II(B)(4): Use for all QPRTs. Delete the bracketed portion unless, rather than giving the Residence itself to the QPRT, the Transferor gives cash to the trust and the trust is to purchase the Residence. This IRS-drafted Paragraph (4) does not require the Transferor’s consent for sale of the residence.  Optional Article VI(C) adds a requirement for the Transferor to consent to any sale, and overrides this Paragraph (4) because it applies “notwithstanding any other provision hereof.”]

(4) REINVESTMENT OF TRUST ASSETS. Except as provided in Article II(B)(5), the Trustee may sell the Residence from time to time upon terms and conditions the Trustee deems appropriate. The Trustee may disburse from time to time any part or all of the amounts described in Paragraph [A(1) and] A(3) above and Paragraph B(6) below, including all income and capital gains thereon, as the Trustee deems appropriate for the purchase or construction of a replacement Residence to be owned by the trust or for the reconstruction or repair of the Residence. These disbursements shall be made, and any reconstruction and repairs shall be completed, within the time periods necessary to allow this trust to continue to qualify as a QPRT, but the Trustee shall not be held liable for any failure in this regard unless the Trustee has acted (or failed to act) through willful default or gross negligence.

[Article II(B)(5): Required for all QPRTs. See  3.2.07.]

(5) PROHIBITION ON SALE OF RESIDENCE TO TRANSFEROR OR RELATED PARTIES. The Trustee is prohibited from selling or transferring (as defined in section 25.2702-5(c)(9) of the regulations) the Residence, directly or indirectly, to the Transferor, the Transferor’s spouse, or an entity controlled by the Transferor or the Transferor’s spouse during the retained term interest of the QPRT, or at any time after the termination of the retained term interest in the QPRT while the trust is treated as owned in whole or in part by the Transferor or the Transferor’s spouse under sections 671 through 678 of the Code.

[Article II(B)(6): Use for all QPRTs. See  3.2.04 3.2.05.]

(6) RECEIPT OF PROCEEDS WITH RESPECT TO RESIDENCE. If the Residence is sold, the Trustee shall hold the proceeds of the sale (along with any income accrued thereon) in a separate account. If the Residence is damaged, destroyed, or involuntarily converted within the meaning of section 1033 of the Code, the Trustee shall hold any proceeds payable as a result thereof (consisting either of insurance proceeds in the case of damage or destruction to the Residence or the proceeds payable upon involuntary conversion) in a separate account. The proceeds (and any interest thereon) so received shall be held, administered, and distributed by the Trustee as provided in this Article II.

[Article II(B)(7), Alt. 1: This IRS version prohibits “sale” of the donor’s interest as well as commutation; see  3.2.06.]

(7) COMMUTATION OF INTERESTS. The Transferor’s interest in the QPRT may not be sold, commuted, or prepaid by any person.

[Article II(B)(7), Alt.2: Recommended: This version follows the wording of Reg.  25.2702-5(c)(6). See  3.2.06 and  7.1.03.]

(7) COMMUTATION OF INTERESTS. Commutation (prepayment) of the Transferor’s interest in the QPRT is prohibited.

[Article II(B)(8). Use for all QPRTs. The IRS’s phrase “Except to the extent provided in D, below” is confusing, because it seems to imply that Section D will permit distributions to someone other than the Transferor during the QPRT term. What the IRS is referring to is the provision of Section D that requires QPRT assets to be placed in a separate “grantor retained annuity trust” (GRAT) under certain circumstances, so the “exception” is that (under D) the trustee can distribute assets to the GRAT as well as to the Transferor. Once in the GRAT, of course, the assets still cannot be distributed to anyone other than the Transferor during the QPRT term, so “D” does not really provide any exception to the rule stated in the following Paragraph (8).]

(8) PROHIBITED DISTRIBUTIONS. Except to the extent provided in Section D below, the Trustee may not make any distribution of income or principal from the QPRT to or for the benefit of any person other than the Transferor prior to the termination of the QPRT. 

[Article II(C), Alt. 1: IRS version. The sample QPRT form in this Appendix is designed to work with the “Alt. 2” version of Article II(C), but this IRS version is included for comparison. The IRS version requires insertion of additional variables: the expiration date of the QPRT (twice), the “transferees” who are to receive the trust property upon expiration of the QPRT term if the donor is then still living, and the transferees who are to receive the trust property if the donor dies prior to expiration of the QPRT term. See Rev. Proc. 2003-42, Section 5.02(5)(a), (b), for the IRS’s suggestions regarding choice of “transferees” upon expiration of the QPRT term.]

C. TERMINATION OF TRUST. The trust’s date of termination shall be the earlier of [date], or the date of the Transferor’s death. Except as otherwise provided in Section D below, the Trustee shall distribute the trust property at the end of the term of the QPRT as provided in this Section C. If the date of termination is [date], the Trustee shall distribute all of the property of the trust (other than any amounts due the Transferor pursuant to this trust instrument) to [designate transfereesif more than one, specify shares]. If the date of termination is the earlier death of the Transferor, the Trustee shall distribute all trust property (other than any amounts due the Transferor’s estate pursuant to this trust instrument) to [designate transfereesif more than one, specify shares].

[Article II(C), Alt. 2: The following version of Section C is designed to work with the rest of the provisions of The QPRT Manual’s sample QPRT form. See  3.1.05 3.1.07,  4.6.02, and  6.3.06 for advantages of naming the donor’s estate as beneficiary, and  6.3.05 for advantage of naming donor’s spouse as beneficiary, under Paragraph (C)(3), in case of Transferor’s death during the QPRT term; see  4.6.02 for tax apportionment clause that may be needed if any beneficiary other than the Transferor’s estate is named under Paragraph (C)(3)]

C. EXPIRATION OF TRANSFEROR’S RETAINED INCOME INTEREST. 

(1) DURATION OF QPRT TERM. The Transferor’s retained right to use the Residence under Article II(B)(1) shall expire on the date which is [NUMBER OF YEARS OF QPRT TERM] from the date the Trust receives the property transferred to it under Article II(A)(1), or (if earlier) on the date of the Transferor’s death. Such expiration date is sometimes referred to herein as the “expiration of the Transferor’s interest” or the “termination of the QPRT.” 

(2) DISPOSITION IF TRANSFEROR SURVIVES THE TERM OF YEARS. Upon such expiration, if the date of expiration is the expiration of the above-stated term of years, the Trustee shall hold, administer, and/or distribute all of the property of the trust (other than any amounts due the Transferor pursuant to this trust instrument) as provided in Article V hereof. 

(3) DISPOSITION IN THE EVENT OF TRANSFEROR’S EARLIER DEATH. If the expiration occurs due to the earlier death of the Transferor, the Trustee shall, upon the Transferor’s death, distribute all trust property to such person or persons (including the Transferor’s estate) as the Transferor shall designate in one or more written instruments filed with the Trustee, or, if more than one such instrument is so filed, in accordance with the last one so filed; and any trust property not effectively so disposed of by such written instrument(s) filed by the Transferor shall be distributed to [here designate the default beneficiary who is to receive the trust property if the Transferor dies before expiration of the QPRT term, such as [the Transferor’s estate] or [the Transferor’s Spouse, if living, otherwise the Transferor’s estate]].
	
[Optional additional Paragraph (4), Alt. 1, for Article II(C), giving the Transferor an additional reversion if all of the Transferor’s issue die during the QPRT term. See  3.5.03 for discussion.]

(4) Notwithstanding any other provision hereof, if at any time prior to the expiration date specified above there shall be no issue of the Transferor living, the trust shall terminate upon the death of the Transferor’s last surviving issue, and, in that event, the Trustee shall distribute the trust property to the Transferor.

[Optional additional Paragraph (4), Alt. 2, for Article II(C), giving the Transferor an additional reversion if all of the “non-skip” remainder beneficiaries (here assumed to be the Transferor’s children) die during the QPRT term. See  3.5.03 for discussion.]

(4) Notwithstanding any other provision hereof, if at any time prior to the expiration date specified above there shall be no Child of the Transferor living, the trust shall terminate upon the death of the Transferor’s last surviving Child, and, in that event, the Trustee shall distribute the trust property to the Transferor.

[Article II(D). See  3.3 regarding this required provision. Paragraph (2) of this Article II(D) requires that any assets that cease to have QPRT status must be transferred (converted) to a GRAT. Apparently the IRS agrees with The QPRT Manual that this is the recommended way to deal with such assets; see discussion of “Option 2” at  3.3.04 3.3.06. Rev. Proc. 2003-42 (Section 6.02) contains alternative language (not reproduced here) that may be substituted if using Option 1 or 3. See  3.4.06 regarding Paragraph (3) (multiple GRAT conversions).]

D. CESSATION OF QUALIFICATION AS A PERSONAL RESIDENCE TRUST.

(1) CESSATION DATE.

(a) The trust shall cease to be a QPRT on the date on which the Residence ceases to be used or held for use as a personal residence of the Transferor within the meaning of section 25.2702-5(c)(7) of the regulations (other than for reasons described in Subparagraphs D(1)(b) or D(1)(c) below).

(b) In the event of a sale of the Residence, the trust shall cease to be a QPRT on the first to occur of the following: (i) the date which is 2 years after the date of sale; (ii) the date of termination as determined in Section C above; or (iii) the date on which a replacement Residence is acquired by the Trustee. If the first to occur is the acquisition of a replacement Residence by the Trustee, then the QPRT shall continue with respect to that replacement Residence, and the trust shall cease to be a QPRT only to the extent of any sale proceeds then held by the Trustee and not used for the purchase of the replacement Residence.

(c) If the Residence is damaged or destroyed, thus making it unusable as a personal residence, the trust shall cease to be a QPRT on the first to occur of the following dates: (i) the date that is 2 years after the date of damage or destruction; (ii) the date of termination as determined in Section C above; or (iii) replacement of or repairs to the Residence are completed or a new Residence is acquired by the Trustee. If the first to occur is the completion of the replacement or repair (or the acquisition of a new Residence), then the QPRT shall continue with respect to the repaired Residence or the new Residence, and the trust shall cease to be a QPRT only to the extent of any insurance proceeds then held by the Trustee and not used for the replacement or repair of the Residence (or the purchase of the new Residence). 

(2) DISTRIBUTION ON CESSATION. Within 30 days after the date on which the trust ceases to be a QPRT with respect to any of its assets, and after satisfying the provisions of Paragraph B(3) of this Article II, the Trustee shall distribute the trust assets with respect to which the trust has ceased to qualify as a  QPRT to a separate share of this trust to be referred to and administered as a GRAT in accordance with Article III below. That GRAT shall continue until the date of termination as defined in Section C above.

(3) MULTIPLE GRATs. Because it may be possible to have more than one cessation of qualification during the term of the QPRT, the Trustee shall create and fund a separate GRAT for each cessation and each GRAT shall be administered as a separate share of the trust in accordance with Article III below.

[Article III: See  3.4 regarding all aspects of Article III. All of Article III through Section (G) is copied directly from the IRS sample QPRT in Rev. Proc. 2003-42, except that in Section (C) in the IRS sample form reads “equal [insert monthly, quarterly, semi-annual or annual] installments,” and this has been shortened to “equal annual installments.” Paragraph (D)(4) and Sections (E) and (F) are required by the “GRAT” regulation; see  3.4.03. See  3.4.05 for possible variation of Section (G).]

ARTICLE III. GRANTOR RETAINED ANNUITY TRUST

Each GRAT administered as a separate share under this Article III (each of which is referred to as “the GRAT” with regard to that separate share) is intended to provide for the payment of a qualified annuity interest as defined in section 25.2702-3 of the regulations for the benefit of the Transferor. No amount shall be paid before the termination of this trust other than to or for the Transferor’s benefit.

A. RIGHT TO RECEIVE ANNUITY. In each taxable year of the GRAT, beginning with the year beginning on the cessation date (as defined below), the Trustee shall pay to the Transferor an annuity, the amount of which shall be determined in accordance with Section D of this Article III. The right of the Transferor to receive the annuity amount begins on the cessation date.

B. CESSATION DATE. The cessation date is the date on which the Residence ceases to be used or held for use as a personal residence of the Transferor, the date of sale of the Residence, or the date of damage to or destruction of the Residence that renders the Residence unusable as a residence, as the case may be.

C. PAYMENT OF ANNUITY. The annuity amount shall be paid in equal annual installments. The annuity amount shall be paid first from the net income of the GRAT and, to the extent net income is not sufficient, from principal. The Trustee may defer payment of any annuity amount otherwise payable after the cessation date until the date that is 30 days after the date that the assets are converted to a GRAT as provided in this trust instrument. Any deferred payment of the annuity amount shall bear interest for the period of deferral, compounded annually, at a rate not less than the rate prescribed in section 7520 of the Code in effect on the cessation date. The Trustee shall reduce the aggregate deferred annuity payments by the amount of income actually distributed to the Transferor during the deferral period.

D. COMPUTATION OF ANNUITY AMOUNT. The amount of the annuity payable to the Transferor shall be determined as follows.

(1) If, on the date that any property of the trust is converted from the QPRT to a GRAT (hereinafter the “conversion date”), the assets of the trust do not include a Residence used or held for use as a personal residence of the Transferor, the annuity shall be the amount determined by dividing the lesser of (a) the value of the interest retained by the Transferor (as of the date of the original transfer) or (b) the value of all the trust assets (as of the conversion date) by the annuity factor determined (i) for the original term of the Transferor’s interest and (ii) at the rate used in valuing the retained interest at the time of the original transfer to the QPRT.

(2) If, on the conversion date, the assets of the trust include a Residence used or held for use as a personal residence of the Transferor, the annuity shall be the amount determined under Paragraph (1) of this Section D multiplied by a fraction. The numerator of the fraction is the excess of the fair market value of the assets of the trust on the conversion date over the fair market value of the assets as to which the trust continues as a QPRT, and the denominator of the fraction is the fair market value of the trust assets on the conversion date.

(3) In computing the annuity amount for any second or subsequent GRAT to be administered under this Article III, the Trustee shall make appropriate adjustments to the formulas above in this Section D that are consistent with the applicable provisions of the Code and the regulations thereunder and with the Transferor’s intent to maintain qualification of each of the trust shares hereunder as a QPRT or a GRAT.

(4) If there is an error in the determination of the annuity amount, then, within a reasonable period after the error is discovered, the difference between the annuity amount payable and the amounts actually paid shall be paid to or for the use of the Transferor by the Trustee in the event of an underpayment, or shall be repaid by the Transferor to the Trustee in the event of an overpayment.

E. PRORATION. Notwithstanding the preceding Sections of this Article III, in determining the annuity amount for a short taxable year, the Trustee shall prorate the annuity amount on a daily basis. In determining the annuity amount for the taxable year of the termination of the GRAT, the Trustee shall prorate the annuity amount for the final period of the annuity interest on a daily basis.

F. ADDITIONAL CONTRIBUTIONS PROHIBITED. No additional contributions shall be made to the GRAT after its creation.

G. TERMINATION OF GRAT. The GRAT shall continue through the date of termination of the QPRT, as defined in Section C of Article II, and shall then terminate. Upon termination of the GRAT, the Trustee shall distribute all of the trust property in the manner described in Section C of Article II as if the GRAT property had been part of the QPRT disposed of under that provision.

[Article III(H), Alt. 1: IRS version; see  3.2.06.]

H. NO COMMUTATION. The Transferor’s interest in the annuity amount may not be sold, commuted, or prepaid by any person.

[Article III(H), Alt.2: This recommended alternative version follows the wording of Reg.  25.2702-3(d)(4) regarding commutation (see  3.2.06) and clarifies that the annuity obligation is limited to the assets of the GRAT.]

H. NO COMMUTATION. Commutation (prepayment) of the Transferor’s interest in the annuity amount is prohibited. The Trustee’s obligation to make any annuity payment is limited to the value of the GRAT at the time such payment is due.

ARTICLE IV. GENERAL PROVISIONS

A. TAXABLE YEAR. The taxable year of the trust shall be the calendar year.

B. GOVERNING LAW. The operation of the trust shall be governed by the laws of the state of [STATE]. The Trustee, however, shall not have or exercise any power or discretion granted under applicable law that would prevent: (1) the QPRT administered under Article II above from meeting the requirements for a qualified personal residence trust under section 2702(a)(3)(A) of the Code and section 25.2702-5(c) of the regulations; or (2) the Transferor’s interest in any GRAT administered under Article III above from meeting the requirements for a qualified annuity interest under section 25.2702-3 of the regulations.

[The following additional “General Provisions,” Article IV(C)(G), are recommended to facilitate trust administration, even though they are not part of the IRS sample QPRT form.]

C. DEFINITIONS. In the interpretation of this trust instrument, the following terms shall have the meanings indicated here:

“Cessation Date” is defined in Article III(B).
“Child” or “Children”: The Transferor’s “Children” means the following now-living children of the Transferor: [NAMES OF TRANSFEROR’S CHILDREN]. A “Child” of the Transferor is any one of the Transferor’s Children.
The “Code” is defined in Article I(A).
“Conversion Date” is defined in Article III(D)(1).

“Current Beneficiaries”: During the term of the QPRT, the “Current Beneficiaries” of the trust (or of any separate and independent share of the trust) are, at any given time, the Transferor and the person or persons who would be entitled or eligible to share in the present or future income or principal of the trust (or of such share) if the term of the QPRT expired at that moment (due to expiration of the term of years specified in Article II(C), not due to the Transferor’s death), excluding, however, any person who then has a living ancestor (other than the Transferor or Transferor’s spouse) who is a Current Beneficiary under this definition. After expiration of the term of the QPRT, the “Current Beneficiaries” of the trust (or of any separate and independent share of the trust) are, at any given time, the person or persons who at such time are entitled or eligible to share in the present or future income or principal of the trust (or of such share), excluding, however, any person who then has a living ancestor (other than the Transferor’s spouse) who is a Current Beneficiary under this definition.
“GRAT” means a “Grantor Retained Annuity Trust” established under Article III.
An “Independent Trustee” is defined in Article IV(F)(2).
“QPRT” or “Qualified Personal Residence Trust” means a qualified personal residence trust as defined in Treasury regulation  25.2702-5(c).
The “regulations” are defined in Article I(A).
The “Residence” is defined in Article II(A)(1).

[The following definition of “Spouse” is required for purposes of the prohibition against sale of the Residence to the Transferor or his spouse (see  3.2.07), and therefore should be used for all QPRTs, even if the Transferor is not married.]
 
Spouse: For purposes of Article II(B)(5), the “Transferor’s spouse” means the Transferor’s spouse at the time of the sale or transfer, within the meaning of applicable Treasury regulations. 

[If the Transferor gives his spouse an interest in (or power over) the QPRT (see  3.6), the trust should define who the “spouse” is for this purpose, for example by using one of the following two Alternative definitions; delete both if the Transferor conveys no interest to any present or future spouse under the QPRT.]

[Alt. 1: “Spouse” means current spouse, unless divorced]

For all other purposes, “the Transferor’s spouse” means [SPOUSE NAME], to whom the Transferor is currently married, if [SPOUSE NAME] and the Transferor are married to each other at the applicable time (or, after the Transferor’s death, if they were married to each other on the date of the Transferor’s death), and no other person.

[Alt. 2: “Spouse” means current spouse, even if later divorced]

For all other purposes, “the Transferor’s spouse” means [SPOUSE NAME], to whom the Transferor is currently married, regardless of whether they are married to each other at the applicable time.

The “term of the QPRT” is defined in Article II(B)(1), and is also sometimes referred to herein as the “retained term interest of the QPRT” or the “retained term interest in the QPRT.”

The “Transferor” means the individual identified as the Transferor at the beginning of this instrument.
The “Trustee” means, at any particular time, the trustee identified at the beginning of this instrument or his, her, its, or their successor(s) in that office duly appointed pursuant to Section (F) of this Article IV.

[Article IV(D): See  3.2.03 regarding this “severance” provision.]

D. SEVERANCE OF TRUST. The Trustee may at the time of establishing any trust or trust share under this instrument or at any later time divide such trust or share into two or more separate shares or trusts. Each such separate share or trust shall be held and administered as a separate trust, on all the same terms and conditions provided for such trust or share prior to its division, but the Trustee may exercise its discretion differently with respect to the separated shares regarding such matters as distributions and investments.

[Article IV(E): See  3.5.04,  3.5.06(A), and  3.6.04.]

E. SPENDTHRIFT PROVISION; DISCLAIMERS

(1) The Transferor reserves the right to assign or transfer, by gift or otherwise, any interest in this trust held by the Transferor. 

(2) Any other beneficiary hereof may assign or transfer, by gift or otherwise, any interest in this trust held by such beneficiary to the Transferor’s spouse or to any descendant of the Transferor’s parents. Except as provided in the preceding sentence, a beneficiary may not sell, pledge, or otherwise transfer any part of his interest in this trust, and the Trustee shall not recognize any such other transfer attempted. The interest of a beneficiary (other than the Transferor) in this Trust shall not be subject to be taken by creditors by any process whatever. 

(3) Any person may disclaim his interest in this trust by means of a “qualified disclaimer” within the meaning of section 2518 of the Code. In the case of a qualified disclaimer, the property or interest disclaimed shall pass as provided by the law applicable to such disclaimers. Any beneficiary may at any time and from time to time relinquish all or part of any interest in or power over this trust he holds or anticipates receiving by means of a written instrument delivered to the Trustee, identifying the section of the trust that creates the interest relinquished, regardless of whether such act constitutes a qualified disclaimer under state or federal law, and regardless of whether such person has previously accepted the interest or power so relinquished. If the relinquishment does not meet the requirements of a qualified disclaimer (or a disclaimer under applicable state law), the section of the trust that creates the interest so relinquished shall thenceforth be applied and interpreted as if such person had died on the effective date of the relinquishment.

[Article IV(F): See  3.5.01 and  3.7.05 regarding choice of trustee.]

F. VACANCIES AND SUCCESSION OF TRUSTEES. 

(1)	Any person serving as Trustee may resign by giving notice under this Section (F). Any individual serving as a Trustee shall be deemed to have resigned if a licensed physician gives notice under this Article that, in such physician’s opinion, such individual is at that time unable to attend to business affairs due to the individual’s mental or physical condition, and that such incapacity is likely to continue for more than 30 days.

(2) 	An “Independent Trustee” means a person who at the applicable time is serving as a trustee hereunder and is not the Transferor, a descendant of the Transferor, the spouse of the Transferor or of such a descendant, or a person who is related or subordinate to any of the foregoing. Generally, actions of the Trustee shall be by majority vote of all persons then serving in the office of Trustee; however, an action that may be taken only by the Independent Trustee shall be taken by majority vote of the persons then serving in the office of Independent Trustee, and no other person then serving as trustee shall have any power or vote regarding such action.

(3)	Additional or further successor Trustees may be appointed by unanimous vote of all persons serving as trustee at the time of the appointment. A successor Trustee shall have the same powers, duties and discretions as the original Trustee.

(4)	If all persons serving as Trustee cease so to serve, without having designated a successor, [SUCCESSOR TRUSTEE NAME] shall be successor Trustee. In the event of a further vacancy in the office of Trustee, with no duly appointed successor, a successor Trustee shall be appointed by the Transferor, if the Transferor is then living and competent to act, or, if the Transferor is not then living or is not then competent, or if the Transferor fails to appoint a successor within 30 days after the occurrence of the vacancy, a successor shall be appointed by a plurality in interest of the Current Beneficiaries (determined, if the Transferor is then living, as if the Transferor were then deceased), with legal guardians voting for minor or otherwise incompetent beneficiaries. 

(5)	Any notice required or permitted under this Section shall be effective if in writing and delivered to: (a) All persons then serving as trustee, other than the person resigning; or, if there is no such other person then serving, to (b) The person or persons named as next successor Trustee, provided there is a successor Trustee who has been duly designated and who is able and willing to accept appointment as such; or, if there is no such successor, to (c) The person or persons entitled to appoint the next successor Trustee (other than the person then resigning).

(6)	A certificate executed by any trustee named herein relating to the succession of trustees hereunder shall be binding upon all persons dealing with the trust. 

G. PERPETUITIES (MAXIMUM DURATION OF THE TRUST). This trust shall terminate, in any event, 21 years from the death of the last to die of the Transferor’s issue living on the date hereof, and the Transferor, and the principal and undistributed income of each share of the trust shall be distributed to the person to whom the Trustee is then permitted or required to distribute the income of such share, or, if there is then more than one beneficiary to whom the Trustee may or must distribute the income of such share, by right of representation to those beneficiaries to whom the Trustee is permitted or required to distribute the income of such share.

[Article IV(H): Optional. See  7.2.05.]

H.	BORROWING

The Trustee may borrow money from any person and secure the loan with a mortgage of the Residence, subject to the following limitations. Such a loan may be taken, and the proceeds of any such loan shall be used, during the term of the QPRT, only for the following purposes of the trust: payment of any debt of the trust; and payment for improvements under Article II(B)(2); and shall be used only for the benefit of the trust beneficiaries, and (during the term of the QPRT) in compliance with the requirements for the Trust’s continued qualification as a qualified personal residence trust as defined in Treasury regulation  25.2702-5(c). To the extent any such loan proceeds have not been used for such permitted purposes within the permitted time frame under other Articles hereof, such loan proceeds shall be repaid to the lender thereof to repay the indebtedness. In no case may such loan proceeds be distributed to the Transferor as part of the distribution of “excess cash” to the Transferor required under Article II(B)(3).

[Article V for use with Approaches #1, #2, and #3]

[The following version of Article V, Sections (A) and (B), are for use with Approaches #1, #2, and #3, to the QPRT-GST tax problem discussed in Chapter 5. There is a separate, complete, version of Article V beginning on page 374 illustrating Approach #4. See detailed descriptions of Approaches #1, #2, and #3 at  5.3 5.5. See also  5.2.07]

ARTICLE V. DISPOSITION OF REMAINDER

The provisions of this Article shall apply following expiration of the term of the QPRT otherwise than by reason of the Transferor’s death.

[Use Section A to provide for the donor’s spouse after expiration of the QPRT term, if the client so desires. See  3.6.02. If the donor does not wish to provide for his spouse, use Alt. 1]

A. PROVISION FOR SPOUSE

[Article V(A)(1), Alt. 1: No provision for spouse. If using this Alt. 1, do not include Paragraph (2).]

This trust makes no provision for any existing or future spouse of the Transferor. Upon the expiration of the term of the QPRT otherwise than by reason of the Transferor’s death the trust shall be administered as provided in Section (B) of this Article V.

[Article V(A)(1), Alt. 2: Life income (only) to Spouse; use with Alt. 1 or 2 version of Section (B). See  3.6.03 3.6.04.]

(1) DURING SPOUSE’S LIFE. The Trustee shall pay to (or apply for the benefit of) the Transferor’s spouse the net income of the trust, at least annually, for life. If the Trust owns the Residence, the Transferor’s spouse shall continue to have the same rights (and obligations) regarding the Residence as the Transferor had during the term of the QPRT.

[Article V(A)(1), Alt. 3: Life income to Spouse, plus principal if needed; use with Alt. 1 or 2 version of paragraph (2). See  3.6.04.]

(1) DURING SPOUSE’S LIFE. The Trustee shall pay to (or apply for the benefit of) the Transferor’s spouse the net income of the trust, at least annually, for life. If the Trust owns the Residence, the Transferor’s spouse shall continue to have the same rights (and obligations) regarding the Residence as the Transferor had during the term of the QPRT. At such times, if any, as the Transferor’s spouse’s income is not sufficient to provide for the Transferor’s spouse’s medical expenses and support, the Trustee shall pay to (or apply for the benefit of) the Transferor’s spouse such amounts of the principal of the trust as shall reasonably be deemed needed to provide for such medical expenses and support.

[Article V(A)(1), Alt. 4: “Spray” trust for spouse and issue; Independent Trustee required; use with Alt. 1 or 2 version of paragraph (2). See  3.6.05.]

(1) DURING SPOUSE’S LIFE. So long as the Transferor’s spouse is living, the Trustee shall pay such amounts of the income and/or principal of the trust as the Independent Trustee deems advisable to (or apply it for the benefit of) such persons as the Independent Trustee shall select from the class consisting of the Transferor’s spouse and the Transferor’s issue living from time to time. 

[Alternatives for what happens after spouse dies; use one of these versions of paragraph (2) with the Alt. 2, 3, or 4 version of paragraph (1)]

[Article V(A)(2), Alt. 1: Spouse is given a power of appointment; see cautions at  3.6.11]

(2) UPON SPOUSE’S DEATH. Upon the Transferor’s spouse’s death (or upon the expiration of the term of the QPRT otherwise than by reason of the Transferor’s death, if such expiration occurs later than the death of the Transferor’s spouse), the Trustee shall distribute the principal of the trust to such person or persons, and in such proportions, as the Transferor’s spouse shall have appointed, by written instrument delivered to the Trustee during the Transferor’s spouse’s lifetime, from among the class consisting of the Transferor’s issue who are not “skip persons” (within the meaning of Chapter 13 of the Code) with respect to the Transferor’s gift(s) to this trust. Any property not fully and effectively so appointed by the Transferor’s spouse shall be administered as provided in Section (B) of this Article V.

[Optional addition to the preceding paragraph (2), to be used if the Transferor is trying to avoid grantor trust status after the QPRT term following the spouse’s death; see  6.1.05.]

Notwithstanding the foregoing, if the Transferor’s spouse survives the expiration of the term of the QPRT, the Trustee shall, during the Transferor’s life, segregate any ordinary income and capital gains that constitute taxable income to the trust for purposes of  674 of the Code and that are not currently distributed to beneficiaries under the preceding provisions hereof. The Transferor’s spouse’s power of appointment shall not apply to income that is earned during the Transferor’s lifetime and that is required to be segregated in accordance with the preceding sentence.

[Article V(A)(2), Alt. 2: Spouse is not given a power of appointment]

(2) UPON SPOUSE’S DEATH. Upon the Transferor’s spouse’s death (or upon the expiration of the term of the QPRT otherwise than by reason of the Transferor’s death, if such expiration occurs later than the death of the Transferor’s spouse), the trust shall be administered as provided in Section (B) of this Article V.

B. PROVISIONS APPLICABLE DURING TRANSFEROR’S LIFETIME

[Article V(B): This Section (B) says what happens to the trust property during the Transferor’s lifetime following expiration of the QPRT term (or following expiration of the QPRT term and expiration of the donor’s spouse’s interest, if applicable); see  3.7.02. Use Alt. 2 or Alt. 3 if the Transferor wants to keep the trust in existence during his lifetime; one of these Alternates should be used if the Transferor plans to rent the Residence back from the trust (see Article VI(B)). Otherwise use Alt. 1.]

[Article V(B), Alt. 1: Use this if the donor does not want to keep the trust in existence.]

Property directed to be administered as provided in this Section (B) shall be held, administered, and distributed as provided in Section (C) of this Article.

[Article V(B), Alt. 2: Income to living children equally so long as Transferor is living; use this if the Transferor will be the trustee (see  3.7.05).]

Property directed to be administered as provided in this Section (B) shall be held, administered, and distributed as follows. So long as the Transferor is living, the Trustee shall pay the net income of the Trust, at least annually, to the Transferor’s Children living at the time of distribution, in equal shares. Upon the death of the Transferor, the trust property shall be disposed of as provided in Section (C) of this Article.						

[Article V(B), Alt. 3: “Spray” trust for issue during Transferor’s life; Independent Trustee required; see  3.7.03(A)]

Property directed to be administered as provided in this Section (B) shall be held, administered, and distributed as follows. So long as the Transferor is living, the Trustee shall pay such amounts of the income and/or principal of the trust as the Independent Trustee deems advisable to (or apply it for the benefit of) such persons as the Independent Trustee shall select from the class consisting of the Transferor’s issue of all generations living from time to time. Upon the death of the Transferor, the remaining trust property, if any, shall be disposed of as provided in Section (C) of this Article.

[Section (C) of “Article V for use with Approaches #1, #2, and #3” contains the dispositive provisions of the trust that apply (if the Transferor survives the QPRT term) after the QPRT term expires, and after the expiration of the interest (if any) given to the Transferor’s spouse under (A), and after the Transferor’s death (if the Transferor elected to keep the trust in existence during his lifetime; see (B)). The three alternative versions of Article V(C) reflect the client’s and advisor’s choice among Approaches #1, #2, and #3 to the generation-skipping transfer (GST) tax issues explained in Chapter 5; see  5.2.05 and  5.3- 5.5.]

APPROACH #1:

[Article V(C) for use with Approach #1: Disposition to Transferor’s issue by right of representation, unless child of the Transferor has died since commencement of the QPRT, in which case the property is placed in a continuation “Spray” trust; see  5.3 for explanation.]

[If a child of the donor died prior to creation of the QPRT, leaving issue then living, the issue of the deceased child would, under this form, automatically receive their proper size share, when the trust terminates and is distributed to “my issue then living,” assuming there have been no other deaths among the donor’s descendants since commencement of the QPRT. Because placing the trust assets in the continuation “spray” trust is triggered only if a distribution to issue would cause a GST tax, Approach #1 automatically accommodates itself to the situation of a child who was deceased prior to the commencement of the QPRT. See  5.2.07(A). In contrast, the forms for Approaches #2, #3, and #4 would have to be substantially modified to accommodate that situation.]

[Approach #1 will not work if all of the intended “non-skip beneficiaries” (typically the Transferor’s children) die before the termination of the trust. For that reason, it is not recommended for the “only child” situation; see  5.2.07(B) and  3.7.04.] 

C. DISPOSITION TO DONOR’S DESCENDANTS

(1) Property to be disposed of under this Section (C) shall be distributed, outright and free of trusts, to the issue of the Transferor who are living at the time such amount becomes distributable, by right of representation, unless such distribution would be (in whole or in part) a “taxable distribution,” “taxable termination,” or other event subject to tax under the provisions of Chapter 13 of the Code, in which case all property to be disposed of under this Section (C) shall, instead, be held in continuing trust under Paragraph (2) of this Section (C), unless Paragraph (4) applies, in which case it shall be distributed as provided in Paragraph (4).

(2) If this Paragraph applies, the Trustee shall hold the property to be disposed of under this Section (C) in a separate trust, to be known as the Continuation Trust. The Trustee shall pay such amounts of the income and/or principal of the Continuation Trust as the Independent Trustee deems advisable to (or apply it for the benefit of) such persons as the Independent Trustee shall select from the class consisting of the Transferor’s [spouse and the Transferor’s] issue of all generations living from time to time. In making such distributions, the Trustee shall bear in mind the Transferor’s intent that (i) the Independent Trustee use its discretion, if feasible, to make distributions to the Transferor’s issue in coordination with the Transferor, the Transferor’s spouse, the executor of the estate of the Transferor or of the Transferor’s spouse, or the trustee of any other trust established by the Transferor or the Transferor’s spouse so that the effect of such coordinated distributions, overall, is to distribute property of equal value to each living child of the Transferor and the issue of each deceased child of the Transferor, even if each child (or issue of each deceased child) does not receive an equal share of each individual trust or fund involved in such coordinated distributions, and (ii) taxes payable by the Transferor’s family be minimized. 

(3) The Continuation Trust shall terminate two years after its establishment, if not earlier terminated through the discretionary distributions authorized under Paragraph (2). Upon termination under this Paragraph (3), the remaining trust property (if any) shall be distributed to the issue of the Transferor then living, by right of representation. 

(4) Notwithstanding the foregoing, if upon the date specified for distribution under paragraph (1) or (3) above, there shall be no descendant of the Transferor living who is not a “skip person” with respect to distributions from this trust (for purposes of imposition of the generation-skipping transfer tax), the trust property shall, instead, be distributed, in equal shares, to the estates of each deceased Child of the Transferor who has left issue who are then living, or, if there are no issue of the Transferor then living, the trust property shall be distributed to [here insert the default beneficiary to take the trust property in the event of a default of issue after expiration of the QPRT term; it can be anyone OTHER THAN the Transferor or the Transferor’s estate; for example: [the Transferor’s spouse, if living, otherwise [NAME OF A CHARITY]] or [the persons who would have inherited the Transferor’s personal property under the laws of [STATE] had the Transferor died a resident thereof, intestate, at the time such property becomes distributable, and in the proportions provided by such laws]].

APPROACH #2:

[Article V(C) for use with Approach #2: Distribution to living children only; see  5.4 for explanation.]

[This version of Article V(C) divides the trust into equal shares, one for each child of the donor living at the time of trust termination. The following V(C) will not work if a child of the donor died prior to creation of the QPRT, leaving issue then living, and the living children of the deceased child collectively are to receive the same size share each living child receives on termination of the trust; this Article V(C) would have to be substantially modified to accommodate that situation. See  5.2.07(A).]

C. DISPOSITION TO DONOR’S DESCENDANTS

[Approach #2: Article V(C)(1), Alt. 1: Distribute outright to living children]

(1) The trust shall terminate, and property to be disposed of under this Section (C) shall be distributed, outright and free of trusts, in equal shares to such of the Children of the Transferor as are then living.

[Approach #2: Article V(C)(1), Alt. 2: First sell the Residence, then distribute trust outright to children]

(1) The trust shall terminate, and property to be disposed of under this Section (C) shall be distributed, outright and free of trusts, in equal shares to such of the Children of the Transferor as are then living; provided, however, that prior to such termination and distribution, the Trustee shall sell the Residence (if it is then owned by the trust) for such price, and on such terms, as the Trustee deems advisable and in the best interest of the beneficiaries. Pending such sale, the Trustee may distribute income or make other distributions to the Transferor’s then-living Children, equally.

[Approach #2: Article V(C), Paragraphs (2) and (3): These go with both of the preceding Alternate versions of Paragraph (1). See  3.7.04 for discussion.]

(2) If, at the time property becomes distributable under this Section (C), there is no Child of the Transferor living, said property shall instead be distributed, in equal shares, to the estates of each deceased Child of the Transferor who has left issue who are then living.

(3) Notwithstanding the foregoing, if at any time after expiration of the term of the QPRT under Article II(C) there shall be no issue of the Transferor living the trust shall terminate upon the death of the last surviving such issue and the trust property shall be distributed to [here insert the default beneficiary to take the trust property in the event of a default of issue after expiration of the QPRT term; it can be anyone OTHER THAN the Transferor or the Transferor’s estate; for example: [the Transferor’s spouse, if living, otherwise [name of a charity]] or [the persons who would have inherited the Transferor’s personal property under the laws of [STATE] had the Transferor died a resident thereof, intestate, at the time such property becomes distributable, and in the proportions provided by such laws].

APPROACH #3:

[Article V(C) for use with Approach #3: Force share of deceased child into deceased child’s gross estate; see  5.5 for explanation.]

[The following three alternate versions of Article V(C) divide the trust into equal shares, one for each child of the donor who is either living at the time of trust termination or who is deceased leaving issue then living (or, in the case of Alt. 3, is then just plain deceased regardless of whether he or she has left issue then living). None of the following three alternative versions of V(C) for Approach #2 will work properly to provide for the issue of a child of the donor who died prior to creation of the QPRT, leaving issue then living; this V(C) would have to be substantially modified to accommodate that situation. See  5.2.07(A).]

C. DISPOSITION TO DONOR’S DESCENDANTS

[Approach #3: Article V(C), Alt. 1: A deceased child’s share of the remainder is allocated to the deceased child’s estate, but only if the child left issue living at the time of the allocation. This would be preferred over Alt. 2 by a donor who wants to keep the trust property in the donor’s bloodline. Note that this disposition requires a clause specifying who receives the property in case of a complete default of issue prior to the date of allocation; see  3.7.04 for discussion.]

Property to be disposed of under this Section (C) shall be allocated into as many equal shares as there are Children of the Transferor then living and Children of the Transferor then deceased who have left issue then living. One such share shall be distributed to each then-living Child of the Transferor outright and free of trusts. A share allocated to a Child of the Transferor who is then deceased leaving issue then living shall be distributed to such Child’s estate. If there are no Children of the Transferor then living, and no Children of the Transferor then deceased leaving issue then living, the trust property shall instead be distributed to [here insert the default beneficiary to take the trust property in the event of a default of issue after expiration of the QPRT term; it can be anyone OTHER THAN the Transferor or the Transferor’s estate; for example: [the Transferor’s spouse, if living, otherwise [name of a charity]] or [the persons who would have inherited the Transferor’s personal property under the laws of [STATE] had the Transferor died a resident thereof, intestate, at the time such property becomes distributable, and in the proportions provided by such laws].

[Approach #3: Article V(C), Alt 2: A deceased child’s share of the remainder is allocated to the deceased child’s estate, regardless of whether the child left issue living at the time of the allocation. This allows each deceased child freely to dispose of his or her own share of the QPRT remainder, including the power to leave that remainder to the deceased child’s spouse. As discussed at  5.5.04, many donors would not want the child to have this much control, but this alternative could make sense if the donor has only one child (and the child is completely trusted), or has few children and, as yet, no grandchildren.]

Property to be disposed of under this Section (C) shall be allocated into as many equal shares as there are Children of the Transferor then living and Children of the Transferor then deceased. One such share shall be distributed to each then-living Child of the Transferor outright and free of trusts.  A share allocated to a Child of the Transferor who is then deceased shall be distributed to such Child’s estate. 

[Approach #3: Article V(C), Alt. 3: A deceased child is given a general power of appointment (see  5.5.05) over his or her share of the QPRT remainder, but only if the child left issue living at the time of the allocation. This would be preferred over Alt. 2 by a donor who wants to keep the trust property in the donor’s bloodline, and would be preferred over Alt. 1 by a donor who wants to minimize (but not eliminate) the chance that the deceased child would leave his or her share of the remainder to someone other than the deceased child’s issue. As with Alt. 1, this disposition requires a clause specifying who receives the property in case of a complete default of issue prior to the date of allocation; see  3.7.04 for discussion.] 

Property to be disposed of under this Section (C) shall be allocated into as many equal shares as there are Children of the Transferor then living and Children of the Transferor then deceased who have left issue then living. One such share shall be distributed to each then-living Child of the Transferor outright and free of trusts. The share allocated to each Child of the Transferor who is then deceased leaving issue then living shall be distributed to such person or persons (including the estate of such deceased Child) as such deceased Child shall have appointed by his or her will specifically referring to this trust. Any part of such share not effectively so appointed shall be distributed to the then-living issue of such deceased Child, by right of representation. If there are no Children of the Transferor then living, and no Children of the Transferor then deceased leaving issue then living, the trust property shall be distributed to [here insert the default beneficiary to take the trust property in the event of a default of issue after expiration of the QPRT term; it can be anyone OTHER THAN the Transferor or the Transferor’s estate; for example: [the Transferor’s spouse, if living, otherwise [name of a charity]] or [the persons who would have inherited the Transferor’s personal property under the laws of [STATE] had the Transferor died a resident thereof, intestate, at the time such property becomes distributable, and in the proportions provided by such laws].

[This is the end of the version of Article V illustrating Approaches #1, #2, and #3.]	

APPROACH #4:

[Article V for use with Approach #4: This is another, complete, version of Article V, illustrating “Approach #4.” See  5.6.]

[Under Approach #4, separate and independent shares are established at the commencement of the trust, one for each living child of the Transferor. See  5.6. If a child dies during the QPRT term, leaving issue, the deceased child’s share passes to his or her issue. The expectation is that the Transferor will allocate part of the Transferor’s GST exemption to the share passing to the issue of such a deceased child.]

[If a child of the donor has died prior to creation of the QPRT, leaving issue then living, and the living children of the deceased child collectively are to receive the same size share each living child receives, divided into further equal subshares (one for each living child of the deceased child), this Article V would have to be substantially modified; a form for that situation is not provided in The QPRT Manual.]

[The following Article V does not provide for default of issue, because it calls for immediate vesting and distribution of the trust upon expiration of the QPRT term. If all of the Transferor’s children or issue died prior to the expiration of the QPRT term, the trust would have reverted to the Transferor, assuming optional Article II(C)(4) was used. If Article II(C)(4) was not used, the following Article V would have to be modified to cover the possibility of default of issue at expiration of the QPRT term.]

ARTICLE V. DISPOSITION OF REMAINDER

A. SEPARATE AND INDEPENDENT SHARES. Notwithstanding any other provision hereof, this trust shall be administered as separate and independent shares, one for each of the Transferor’s Children. Each such share shall be administered as a “separate and independent share” within the meaning of Reg.  26.2654-1(a)(1)(i), as if it were a separate trust, on the terms and conditions set out in this instrument. The Transferor, upon transferring any property to this trust, shall indicate to which of the said separate shares such property shall be allocated, and the Trustee, upon receipt of such property, shall allocate it to and administer it as a part of, the separate and independent share so indicated by the Transferor. Upon receipt of any property as an addition to this trust for which the Transferor has not indicated any allocation pursuant to the preceding sentence, the Trustee shall allocate such property equally among the separate shares established for the Transferor’s Children.

B. VESTING OF SHARES UPON EXPIRATION OF TERM OF THE QPRT. Upon the expiration of the term of the QPRT otherwise than by reason of the Transferor’s death, each separate share of the trust shall vest in the Child for whose benefit such share was established, if such Child is then living. If such Child is not then living, but has left issue who are then living, such share shall vest in such Child’s then living, issue by right of representation. If such Child is not then living, and has left no issue who are then living, such share shall vest in the Transferor’s issue then living, by right of representation; provided, that each such issue’s portion of the deceased Child’s share shall be added to, and administered as a part of, the separate and independent share of this trust of which such issue is a beneficiary. It is the Transferor’s expectation that the Transferor will allocate the Transferor’s GST exemption at that time to any share thus vesting in issue of a deceased Child. 

C. SHARE ALLOCATED TO CHILD. A vested share allocated to a Child of the Transferor under Section (B) shall be distributed to such Child.

D. SHARE ALLOCATED TO ISSUE OF DECEASED CHILD.  A vested share allocated to issue of a deceased Child of the Transferor under Section (B) shall be distributed to the then living issue of such deceased Child, by right of representation.

[End of the various alternative versions of Article V.]

[The following Article VI, though not part of the IRS sample QPRT, is recommended for consideration with all QPRTs.]

ARTICLE VI: MISCELLANEOUS PROVISIONS

[Article VI(A): Recommended. Attach your law firm’s typical schedule with standard trust administrative provisions covering such matters as trust accounting and provision for minor or disabled beneficiaries. The IRS sample QPRT does not contain administrative provisions, but Rev. Proc. 2003-42, Section 5.04, provides that “The trust instrument may contain administrative provisions relating to the trustee’s duties and powers, as long as the provisions do not conflict with the rules governing QPRTs under section 2702(a)(3)(A) and section 25.2702-5(c), or the rules governing qualified annuity interests under section 25.2702-3. A clause may be included that provides: “Except to the extent provided otherwise in Article II and Article III, the Trustee has the following powers.”]

A. ADMINISTRATIVE PROVISIONS INCORPORATED BY REFERENCE.  Except to the extent provided otherwise in Article II and Article III, the provisions of “Schedule A” (which is attached hereto and incorporated herein by reference) shall apply.

[Article VI(B): Optional. Use a provision such as this if the Transferor wants the option to rent the Residence following expiration of the QPRT term. See  3.7.01. This provision is designed for use with versions of “ARTICLE V for use with Approaches #1, #2, and #3,” Article V(B), under which the Residence remains in trust during the Transferor’s life, namely, Alts. 2 and 3. If the residence passes outright to the donor’s children or other remainder beneficiaries at the end of the QPRT term, and the donor wants the option to rent from them, the option would have to be reworded accordingly, and would probably have to be included in the deed of the property or otherwise recorded, in order to be binding on post-trust owners of the property.]

B. TRANSFEROR’S OPTION TO RENT. 	

This Section B shall apply after expiration of the term of the QPRT (see Article II(C)) [Add the following if the Transferor’s spouse has a life estate in the Residence following expiration of the QPRT term, as in “ARTICLE V for use with Approaches #1, #2, and #3,” Article V(A)(1), Alt. 2 or 3: and after expiration of the Transferor’s spouse’s right to income of the trust under Article V(A)(1)].

(1) Transferor shall have the option to rent any Residence held by the Trust for its fair market rental value. “Fair market rental value” shall mean the rent a willing tenant would pay to a willing lessor, neither being under any compulsion to act, to lease the Trust’s entire interest in the Residence, free and clear of any trusts, mortgages or other encumbrances. The Transferor’s tenancy under this option shall be from month to month, or for such other term as the Trustee and the Transferor may from time to time agree, and shall be upon the standard terms used in leases of comparable residential real estate in the vicinity of the Residence, such as (if applicable) payment of a security deposit and advance rental, restrictions on subletting, and lessor’s remedies.

(2) The option to rent shall be exercised by delivering written notice to the Trustee; provided, that if the Transferor remains in possession of a residence owned by the trust beyond the expiration of the QPRT term, and beyond the end of any other period of time (such as the term of a prior lease with the trust) that he was in occupancy as a matter of right, or at the sufferance of another person who occupied as a matter of right, such continued occupancy by the Transferor shall be deemed an exercise of the Transferor’s option to rent hereunder and the Trustee shall be entitled to receive rent for such occupancy and shall be entitled to all other rights of a landlord under the standard terms used in leases of comparable residential real estate in the vicinity of the Residence.

(3) The “fair market rental value” of any residence owned by the trust shall be determined by one of the following methods:

(a)	If at the applicable time there is an Independent Trustee serving, the “fair market rental value” shall be as determined by agreement between the Transferor and the Independent Trustee or, if they are unable to agree within 10 days of the exercise of the Transferor’s option to rent, by appraisal by a qualified appraiser selected by the Independent Trustee.

(b)	If at the applicable time there is no Independent Trustee serving, the “fair market rental value” shall be as determined by agreement between the Transferor and the Current Beneficiaries, or, if they are unable to agree within 10 days of the exercise of the Transferor’s option to rent, by appraisal by a qualified appraiser selected by the Current Beneficiaries.

(c)	For purposes of this section, a “qualified appraiser” means a licensed real estate broker or manager who has at least five years’ experience renting and/or managing rentals of comparable residential properties in the market where the Residence is located.

(d)	The reasonable expense of any appraisal shall be paid by the Transferor.

(4) The Transferor’s option to rent shall expire on the Transferor’s death. The Transferor may not assign this option but may relinquish it at any time, temporarily or permanently.

(5) If there is more than one Current Beneficiary, the vote of a plurality in interest of the Current Beneficiaries, with legal guardians (other than the Transferor) acting for minors and other legally incompetent persons, shall be considered the act of the Current Beneficiaries.

(6) At any time when a residence held by the trust is not being rented to the Transferor, the Trustee shall be entitled to rent the Residence to others, free and clear of any option, by following the procedure under this paragraph. The Trustee shall notify the Transferor of the Trustee’s intent to offer the Residence for rental (“Notice of Intent to Rent”). If the Transferor does not deliver to the Trustee written notice of the Transferor’s exercise of the Transferor’s option to rent as described in the preceding paragraphs within thirty 30 days of the receipt of the Trustee’s notice, the Transferor’s option shall lapse. The Trustee shall then be free to offer the Residence for rental to others by whatever means the Trustee deems advisable, and to rent the Residence to others, for a period of 13 months from the date of the Trustee’s Notice of Intent to Rent; provided, that if the Trustee has, during said 13 months, entered into a binding lease for the Residence for a term not to exceed 3 years, the Trustee shall be entitled to rent the Residence pursuant to such lease even if the term of such lease extends beyond the expiration of said 13 month period. If, at the end of said 13 months, the Trustee has not rented the Residence to others, the Transferor’s option to rent shall be revived, and the Trustee shall thereafter be free to rent the Residence to a third party only if the Trustee once again complies with the procedure of this section. If, at the end of said 13 months, the Trustee has leased the Residence to one or more third parties, the Transferor’s option to rent shall be revived at such time as the Trustee is no longer obligated to rent the premises to others under such lease, and the Trustee shall thereafter be free to rent the Residence to others only if the Trustee again complies with the procedure of this section.

(7) If, after having exercised the Transferor’s option to rent, the Transferor then defaults and fails to fulfill the Transferor’s obligation to rent the Residence, or if the Transferor defaults in the Transferor’s obligations under the terms of the Transferor’s tenancy and fails to cure the default within 30 days, or repeatedly defaults under the terms of the Transferor’s tenancy, the Transferor’s option shall expire permanently. This section shall not be deemed to limit any other remedies the Trustee may have on account of such default.

[Optional: The following Article VI(C) illustrates a way for the Transferor to retain control over the Trust’s ability to sell the Residence. See  3.7.06 for discussion and risks.]

C. ADDITIONAL REQUIREMENTS FOR SALE OF RESIDENCE. Notwithstanding any other provision hereof, the Trustee’s power to sell the Residence shall be limited as provided in this Section (C). Failure to comply with this Section (C) shall not invalidate any sale of the Residence. If there is any sale of the Residence by the Trustee that is in violation of this Section (C), the Transferor’s sole remedy shall be against the Trustee; the Transferor shall have no remedy against the purchaser of the Residence or the purchaser’s successors in title. The Transferor shall hold harmless any buyer of the Residence from the Trust against any claim by the Transferor or his heirs or assigns based on the Transferor’s rights under this Section (C). The Transferor shall be deemed to have waived the Transferor’s rights under this Section (C) if the Transferor is in default on any of the Transferor’s obligations to the Trust for a period of more than 30 days following notice of such default, or in the event of three or more defaults by the Transferor in any 12-month period. 

(1) DONOR’S CONSENT REQUIRED DURING QPRT TERM OR WHEN TRUST IS A “GRANTOR TRUST.” During the retained term interest of the QPRT, or at any time after the termination of the retained term interest in the QPRT while the trust is treated as owned in whole or in part by the Transferor or the Transferor’s spouse under sections 671 through 678 of the Code, the Trustee may not sell the Residence without the written consent of the Transferor. Such consent may be given before or after any sale, and the Transferor may waive this right permanently or temporarily by written notice to the Trustee. The Transferor shall be deemed to have consented to any sale if the Transferor does not notify the Trustee of the Transferor’s refusal to consent thereto within 30 days after receiving written notice of the Trustee’s intent to sell, provided, that such notice of intent to sell shall provide notice of the intended purchase price and other terms. Following the Transferor’s consent to a sale, the Trustee shall be free for a period of 12 months to sell the Residence for the price specified in the Trustee’s notice of intent to sell (or for any higher price) without being required to seek a further consent of the Transferor under this paragraph.

(2) DONOR’S RIGHT OF FIRST REFUSAL AT OTHER TIMES. At any time when paragraph (1) does not apply, the Trustee may sell the Residence to such persons, at such times, and on such terms as the Trustee deems advisable and in the best interest of the trust beneficiaries, in the exercise of its fiduciary judgment; provided, that the Trustee may not sell the Residence without first offering it for sale to the Transferor on the same terms and conditions on which the Trustee proposes to sell the Residence to a third party. Alternatively, the Trustee may, in the exercise of its fiduciary judgment, before offering the property for sale to others, offer it for sale to the Transferor at its then fair market value as determined by appraisal. The Transferor may waive this right of first refusal permanently or temporarily by written notice to the Trustee. The Transferor shall be deemed to have waived the Transferor’s right of first refusal with respect to any sale if the Transferor does not exercise the Transferor’s right of first refusal (by written notice to the Trustee, accompanied by appropriate tender of payment) within 30 days after receiving written notice of the Trustee’s intent to sell, provided, that such notice of intent to sell shall state the intended sale price (or appraised value, as the case may be) and all other terms. Following the Transferor’s waiver with respect a proposed sale by the Trustee, the Trustee shall be free for a period of 12 months to sell the Residence for the price specified in the Trustee’s notice of intent to sell (or for any higher price) without being required to again offer the property to the Transferor under this paragraph.
 
[Article VI(D): Optional. The following is recommended if the residence is subject to a mortgage. See  2.7.03.]

D. RESIDENCE SUBJECT TO MORTGAGE. If the Residence is subject to a mortgage, the Transferor hereby covenants and agrees to make each payment due under such mortgage no later than the due date thereof. Each payment of principal made by the Transferor during the term of the QPRT shall be treated as an advance by the Transferor to the trust, and shall be repaid by the trust to the Transferor, without interest, upon the expiration of the term of the QPRT. The Trustee shall convey a second mortgage of the Residence to the Transferor to evidence and secure this obligation.

IN WITNESS WHEREOF, the Transferor has hereunto set the Transferor’s hand and seal and, as evidence of its acceptance of the Trust hereby created, the Trustee has set its hand and seal, on the date written at the beginning of this instrument.
_____________________			________________
[TRANSFEROR NAME]			[TRUSTEE NAME]

(Add notarization paragraph if required.)

Form 2: Summary of Qualified Personal Residence Trust

This is an example of a summary of a QPRT prepared for a married donor who gives his spouse a life estate (but no power of appointment) after the QPRT term, reserves the right to rent the residence, and uses “Approach #1” to solve the GST tax dilemma.

Summary of
[TRUST NAME] Residence Trust
Prepared for [NAME OF CLIENT/TRANSFEROR]
(Draft of [DATE])
	
You are the creator of this trust. In the trust instrument, you are called the “Transferor,” which is the IRS terminology for the person who contributes a residence to this type of trust. The Trustees are you and your spouse, [SPOUSE NAME].

I.	Creating the QPRT; the “QPRT Term.”

This trust is intended to hold the real estate known as [ADDRESS] (the “Residence”). The trust is intended to qualify as a “qualified personal residence trust” or “QPRT” (pronounced KEW-pert) under the Internal Revenue Service regulations.
During the initial term of the trust (see below), the Trustee is to hold the Residence. You have the exclusive right to live in the Residence during this period. You must pay all expenses of the Residence. The Trustee can rent out the Residence during any parts of the year that you are not living there, with your permission.
The initial term of the trust, under the enclosed draft, is [NUMBER] years (the “QPRT term”). This means that the QPRT term would end when you are age [AGE] (nearest birthday). The length of the QPRT term determines the amount of the taxable gift that you make by transferring the Residence to the trust. Since the people to whom you are giving the Residence do not receive it until the QPRT term ends, and then only receive it if you are still living, the value of the gift is less than the value of the Residence.
The longer the QPRT term, the lower the gift tax value. With the [NUMBER OF YEARS OF PROPOSED QPRT TERM] year term in this QPRT, the gift tax value on transfer of a Residence worth [VALUE OF RESIDENCE] would be about [TAXABLE GIFT AMOUNT]. The trick is to choose the longest term you can (to reduce the gift tax value), but also choose a period short enough so that you are most likely to still be living when the QPRT term ends. If you die before the QPRT term ends, the trust does not save any taxes.
Although it is anticipated that the trust will continue for the entire QPRT term, and will hold the Residence for that term, and that you will use the Residence as your personal residence during that term, it is possible that something could occur that could prevent this. For example, the Residence could be sold; or it could be destroyed by a casualty; or you could simply stop using the Residence as a residence for some other reason. Sale of the Residence requires your consent.

If you cease using the Residence as your personal residence for any reason, then the Trustee is required to distribute a certain annuity amount to you annually for the balance of the QPRT term. The amount of the distributions is determined by an IRS formula. The distributions could be in cash or by distributing partial interests in the Residence.
The only exception to this strict rule is that, if the Residence is sold, the IRS would permit the Trustee to invest the sale proceeds in buying a replacement Residence for you within two years. In that case, distributions would not be required as the trust property would be deemed continuously used by you as a personal residence.

II.	What happens after the QPRT term

At the end of the QPRT term, you cease to be the beneficiary of the trust.  If your spouse is then living, your spouse becomes the life beneficiary of the trust. Your spouse receives all income of the trust. If the trust owns the Residence, your spouse can live there without payment of rent.  If your spouse’s income and other resources are not sufficient for your spouse’s health and support, the Trustee is to distribute principal to your spouse for those purposes. This provides a safety valve in case of financial need; it is not anticipated that your spouse would require principal distributions from this trust.
After your spouse’s death, the trust is held for the benefit of your children. The income of the trust is paid to the children in equal shares at least annually.
You reserve the right, after the QPRT term, and after the expiration of your spouse’s interest, to rent the Residence for the rest of your life at fair market value. Fair market value means the amount of annual or monthly rent an unrelated person would pay, at that time, to occupy the Residence. “Market value” rent is determined annually.

III.	What happens if you do not survive the term

If you do not survive the QPRT term, then all of the trust property is still considered part of your taxable estate under IRS rules. In that case, you reserve the right to say who will receive the property upon your death. You can choose anyone in the world. If you take no further action to change this provision, and you die before the QPRT term ends, then the trust property will be distributed to your spouse, if living, otherwise to your estate.
This is one of the two economic benefits that you have reserved under the trust: the right to occupy the Residence, rent-free, during the QPRT term; and the right (if you happen to die before the end of the QPRT term) to say who will receive the trust property. 
You also have the right to occupy the Residence after the QPRT term expires; but that is not considered an economic benefit because you must pay fair market-rate rent for such continued occupancy.

IV.	What happens when you and your spouse are both deceased

If you survived the QPRT term, then, when you and your spouse are both deceased, the Trustee is to sell the Residence and distribute the proceeds to your children equally.

However, if one of your children has died prior to termination of the trust, leaving issue (children or grandchildren), then the trust is not immediately distributed. Instead it is held in a special continuation trust that may last up to two more years. Under this continuation trust, the Independent Trustee is to distribute the trust property to your living issue in coordination with the trustees of other trusts you and your spouse have created, or in coordination with the executors of your and/or your spouse’s estates. The goal of these coordinated distributions is to make sure that each of your living children, and the issue of each deceased child, receive an equal share. 
For reasons having to do with the very onerous “generation skipping tax,” it is desirable that the issue of any deceased child of yours not receive a share of the QPRT. With the coordinated distributions described above, this trust could be distributed to your living children, and the issue of your deceased child could be compensated from other trusts. Specifically, the [NAMES OF OTHER TRUSTS CREATED BY CLIENT AND SPOUSE] have been amended so that the trustees of those trusts are authorized to carry out the coordinated distributions with the trustee of this trust.

V.	The Trustee

Initially you and your spouse are the only Trustees. If one of you ceases to serve as Trustee, the other spouse is sole Trustee, and has the right to appoint a successor Trustee. If both you and your spouse cease to serve as Trustees without having named some other successor Trustee, [NAME OF INDEPENDENT SUCCESSOR TRUSTEE] would become the successor Trustee.

VI.	Benefits, Risks and Drawbacks

The plan and expectation is that the QPRT will save substantial estate taxes for your descendants. For example, using a [NUMBER OF YEARS]-year term, and if the Residence is valued at [RESIDENCE VALUE] today, and you survive the QPRT term, the QPRT will save about $[ESTIMATED TAX SAVINGS] of federal estate taxes, based on today’s estate tax laws. It will save even more if the Residence appreciates in value.
As with any plan, there are risks and drawbacks, things that could upset the tax-saving plan. Here is a list of these:

A. Failure to survive the QPRT term

If you do not survive the QPRT term, this trust will not save any taxes, because all the trust property will be back in your estate for estate tax purposes. Furthermore, you will have wasted the transaction costs (primarily my legal fee) and missed the opportunity to possibly use other estate tax saving devices in the meantime.
One way to cover that risk is to buy a term insurance policy the term of which coincides with the QPRT term. The face amount of the policy would equal the anticipated tax savings. The policy could be owned by your children or another trust (it cannot be owned by the QPRT and should not be owned by you or your spouse). That way, the financial benefit of the QPRT will be realized whether you survive the term (QPRT works) or do not survive the term (QPRT fails, but insurance policy pays off).

B. Estate tax repeal

If the estate tax is repealed (or kept in force with such a large “exemption amount” that your estate is totally exempted), this trust will have been unnecessary and will not save any taxes. Furthermore, the transaction costs (such as legal fees) will have been wasted. As we have discussed, creating the QPRT is a “bet” that the estate tax will not be repealed. If the estate tax remains in force, the tax savings from the QPRT should be substantial. If the estate tax is repealed, you have lost the transaction costs and have given away your residence to your children sooner than you might have otherwise.

C. Residence value declines

If the Residence depreciates in value, the tax savings will be less than anticipated. It would have to depreciate very substantially to eliminate the tax savings of the QPRT. Unlike some other popular estate tax-reduction techniques, the success of the QPRT does not depend on the value of the Residence increasing in value more rapidly than the IRS-predicted rate. The QPRT will save taxes even if the Residence stays flat in value.

D. Ceasing to use Residence as your residence

If you cease to use the Residence as your personal residence for any reason prior to the end of the QPRT term (other than because it is sold, with the proceeds invested in a replacement residence within two years), the trust “ceases to be a QPRT,” under the IRS rules. In that case, the trust must distribute annuity payments to you. Every time the trust distributes one of these payments to you, the tax savings of the trust are diminished, because part of the trust property is coming back into your taxable estate. 
Unless the “cessation of QPRT status” occurs near the end of the QPRT term, the annuity payments could seriously erode the anticipated tax savings. That is why it is important that, when you create the QPRT, you have every expectation that you will continue to reside in the Residence throughout the QPRT term. However, obviously there is a risk that unforeseen circumstances could force you to change that plan and thus lose the tax benefits of the QPRT.

E. Rental payments to the trust

The expectation is that you will rent the Residence back from the trust after expiration of the older generation’s interests. The rental payments will probably constitute taxable income to your children, but you will not receive a tax deduction. This is still considered a tax bargain, because income tax rates are lower than the estate/gift tax rates that must be paid on other money you transfer to them.

F. Unusual order of deaths

Another risk has to do with the “generation-skipping transfer” (GST) tax. As explained above, because of that onerous tax, it is best for no distributions to be made from the QPRT to your grandchildren, even grandchildren who are children of a child of yours who dies after the QPRT is initiated. That problem can be overcome, if one of your children dies, or even if two die, by coordinated distributions under your other trusts to equalize the shares of each “branch.” 
However, in the extremely unlikely and unfortunate event that all of your children die prior to termination of this trust, it then becomes almost impossible for this trust to make distributions to your descendants without incurring the heavy GST tax. Because this disastrous scenario is so unlikely to occur, it is not a good reason not to do a QPRT. However, it is a risk that must be dealt with.
Here is how the enclosed QPRT deals with that problem. First, if you have grandchildren then living, the trust would pass to the “estates” of your deceased children who had left issue then living. Thus, the deceased child’s will would dispose of the deceased child’s share of the property. It is generally believed (but not certain) that this approach will eliminate the GST tax on the share, provided that the deceased child left the asset in his will to someone at the generation level of your grandchildren or above.
It is hoped that the deceased child would leave his share of the QPRT to his or her own children, but there is an unavoidable risk that the deceased child would leave it to someone you might not approve of. 
If this risk is not acceptable, another approach would be to have the trust pass automatically to your grandchildren despite the GST tax that would result. You could insure against that risk by purchasing (through a different trust) life insurance on the lives of your children, that would compensate their children for GST tax incurred in the unlikely event that all your children predecease you and your spouse. The enclosed QPRT also provides that, if all of your issue (that means children, grandchildren, and great-grandchildren, if any) die before this trust terminates, while your spouse is still living, the trust terminates and passes outright to your spouse; otherwise it passes to the same default beneficiary you have named in your other estate planning documents, namely, [NAME OF WIPEOUT BENEFICIARY].

G. Vulnerability to creditors

Under the laws of our state, a QPRT is somewhat vulnerable to claims of your creditors. If you are subject to major risk of uninsured claims against you, this may not be the best asset protection plan.

H. Irrevocability

Finally, the QPRT is an irrevocable trust, and your deed conveying the Residence to the QPRT constitutes an irrevocable gift. You will not be able to change the disposition of this property after you have made that gift. For example, you cannot later change your mind and increase or decrease the share of this trust passing to a particular child. You cannot get the Residence back.

I. Miscellaneous personal factors

As we discussed, your title and homeowners’ insurance policies will make certain adjustments because of the change of title, and [LIST ANY OTHER PERSONAL FACTORS].

VII.	The next step

Once the QPRT is funded, you must file a gift tax return reporting the gift, and notify the applicable insurance companies. After that, there is no need to “do anything” until expiration of the QPRT term. You will continue to live in the Residence and pay all the bills, just as before. 
If any major expenditure is contemplated regarding the Residence, contact us before making it. Though you are required to pay “expenses,” that does not include “capital improvements.” Your paying for capital improvements would constitute an additional gift to the QPRT, with resulting gift tax consequences. Though there is not always a bright line between what is an “expense” and what is a “capital improvement,” it pays to be cautious because making additional gifts to a QPRT is not to be done lightly.
You should also contact us if: you plan to sell the residence or move out of it; if there are other changes in the use of the residence or in who lives there; or if there are other significant changes that would affect your estate plan such as a marriage, divorce, birth, or death in the immediate family.
Finally, before the QPRT term expires, we will need to get together to review how the trust will operate following expiration of the term.	

Form 3: Sample Statement to Attach to Gift Tax Return

This sample statement illustrates the suggestions in  4.3.01, items 38, and 11. This sample statement does NOT include an “explanation giving the factual basis” for claimed partial interest discounts (item 2 on the list at  4.3.01).	

	Statement and Trust Certification Attached to Gift Tax Return of
[DONOR NAME] for the year [YEAR OF GIFT]

The purpose of this Statement is to explain certain aspects of the attached gift tax return and to adequately show (within the meaning of Reg.  301.6501(c)-1(e)(1)) a certain transaction which is claimed to qualify for exemption from the special valuation rules of Chapter 14 of the Internal Revenue Code under the exemption for qualified personal residence trusts. See Reg.  25.2702-5(c).

A. Description of transaction: On [Month Day, Year], [DONOR NAME] (“Donor”) transferred certain real property to the [TRUST NAME] Residence Trust (“Trust”). 

B. Description of real property transferred: Single family dwelling and [NUMBER OF ACRES]-acre lot on which it is located, including improvements [LIST APPURTENANT STRUCTURES AND IMPROVEMENTS] (collectively, “Property”) situated at [STREET ADDRESS], [TOWN NAME], [COUNTY NAME], [STATE NAME]. For Donor’s title to Property, see deed of [NAME OF DONOR’S PREDECESSOR IN TITLE] dated [DATE] recorded at [COUNTY NAME] Registry of Deeds, [ADDRESS OF REGISTRY], Book [NUMBER], Page [NUMBER]. For detailed description, see appraisal attached. The value of Property is $[VALUE], per appraisal attached.

C. Description of Trust and retained interests: Trust is an irrevocable trust intended to be a qualified personal residence trust within the meaning of Reg.  25.2702-5(c). Under Trust, Donor reserves the right to live in Property for a term of [NUMBER OF YEARS OF QPRT TERM] years (the “Term”). If Donor dies prior to expiration of the Term, Property reverts to Donor’s estate or designee. Upon expiration of the Term, if Donor is still living, Property passes to a trust that benefits Donor’s [spouse and] children. A certified copy of Trust is attached hereto.

D. Method used to value: The value of Donor’s gift was determined by subtracting, from the value of Property (per attached appraisal), the value of Donor’s retained income interest and contingent reversion described above. Donor’s retained interests were valued in accordance with regulations for the valuation of life estates, remainders, and terms-for-years, using the  7520 rate applicable for the month in which the gift occurred, which was [RATE] percent. The attached computer printout shows the actuarial factors and discounts used. [ATTACH PRINTOUT FROM NUMBERCRUNCHER OR TIGER TABLES]. 

E. Identity and Relationships: Donor is the trustee of Trust. The beneficiaries of Trust are Donor and Donor’s spouse and children. No other parties hold any equity interest in Property or Trust.

F. Estate tax inclusion period: This gift creates the opening of an estate tax inclusion period (“ETIP”) because Donor has retained the possession, enjoyment, and income of Property; see attached trust instrument and IRC sections 2642(f)(3) and 2036. 

G. Reason for reporting gift in Part 1: Because of the ETIP, Donor’s GST exemption is not to be allocated, automatically or otherwise, to the transfer reported in this return until, at the earliest, the expiration of the ETIP. For that reason, the above gift was reported in Part 1 of Schedule A rather than in Part 3, without regard to whether any “indirect skip” may later be deemed to occur with respect to Trust. 

Signed:____________________________
[DONOR NAME]

H. Trustee’s certification of trust instrument:

The undersigned, being the trustee of [TRUST NAME] Residence Trust under Agreement dated [MONTH DAY, YEAR], which is the recipient of the gift described above, hereby certify that the attached copy is a true and complete copy of the said Agreement of Trust and that the same has not been amended as of the date hereof.

Signed this___________day of___________, 20_______.

__________________________
[TRUSTEE NAME]