The Qualified Personal Residence Trust
By:  Lewis W. Dymond, Esq.


For  many  individuals,  their  residence  is  the  single  most  valuable  asset  they
own.  By  putting  his  residence  into  a  qualified  personal  residence  trust
("QPRT") during his life, an individual can transfer the residence to his children
at  a  significantly  lower  transfer  tax  cost  than  he  would  incur  if  he  left  the
residence to them in his will.
A QPRT  (sometimes called a  "residence GRIT") is  specifically authorized  by
the  Internal Revenue Service Section 2702 of the Code. Close attention to the
requirements of the IRS regs for that section of the Code is essential in planning
to use a QPRT.
Let  me  describe  how  a  QPRT  can  reduce  the  gift  and  estate  tax  costs  of
transferring a personal residence to family members. I will discuss the non-tax
considerations  which  should  be  addressed  in  deciding  whether  to  create  a
How a QPRT can reduce transfer tax costs:
An individual  (grantor) creates a QPRT by transferring his personal  residence
to  a trust  and  retaining the  right to  use the  residence without the  payment  of
rent for a specified period of time.
At the end  of that  period, the  residence either  passes  outright to  beneficiaries
designated by the grantor (usually members of his family) or continues in trust
for their  benefit.  The  grantor  may  continue to  occupy the  residence  after  his
retained interest terminates,  but  if  he  does  so  he  must  pay  fair  market  value
When  the  grantor transfers  his  residence to  the  trust,  he  is treated  as  having
made  a  gift  to  the  family  members  who  will  receive  the  residence  when  his
retained interest terminates. The value of the gift is the fair market value of the
residence,  reduced  by the  present  value  of the  grantor's  retained interest  (the
right  to  live  in  the  residence  rent  free  for  the  specified  period  of  time).  The
present value of the  retained interest is determined by using the  IRS valuation
tables and the Code Sec. 7520 interest rate for the month of the transfer.
This method  of  valuation is advantageous to the  grantor  because the  value  of
his retained interest, determined under Code Secs. 7520, will usually be greater
than the rental value of the residence based on market conditions. The result is
an  unrealistically  high  discount  for  gift  tax  purposes--but  one  that  IRS  can't
challenge, because use of the  IRS valuation tables is mandated by Code Secs.
When  the  grantor's  retained  interest  terminates,  the  residence  passes  to  the
family members free of additional gift tax, even if it has appreciated in value
since  the  trust  was  created.  Thus,  use  of  a  QPRT  "freezes"  the  value  of  the
residence  at  its  market  value  when  the  trust  is  created.  This  means  that  the
transfer tax savings that can be achieved with a QPRT are especially high if the
trust is created at a time when real estate market  values are low.
If the grantor is still living when his retained interest terminates, the residence
won't  be  includible  in  his  gross  estate  for  estate  tax  purposes  (unless  he
continues to live in the residence without paying fair market value rent). If the
grantor  dies  during  the  term  of  his  retained  interest,  the  residence  will  be
includible in his gross estate under the retained life estate rule. But he won't be
any worse off than he would have been if he hadn't created the trust in the first
As previously stated, for a QPRT to work, the grantor has to survive the term of
his retained interest. But if he does, that means that ownership of his residence
will pass to the remainder-men of the trust (usually the grantor's children) while
he's still alive, and he will have to pay  rent to them if he wants to continue to
occupy the  residence.  If  he  continues to  occupy the  residence without  paying
fair market  value  rent, the  residence will  be includible in  his  gross estate and
the transfer tax savings potential of the QPRT will be lost.
Many  people  feel  uncomfortable  about  the  prospect  of  living  in  a  residence
owned by--and paying rent to--their children. For some people, the potential tax
savings offered by a QPRT will outweigh the anxiety they feel about giving up
ownership  of  their  residence  to  their  children.  But  others  will  be  willing  to
forego the tax savings  for the sake of continuing to own their own home until
they die.
The decision is such a personal one that it should be made by you alone, with
no pressure in either direction from the planner. The planner's job is to provide
you with all the   information you need to make a  fully informed decision. To
that end, make sure you are aware of the following points:
       1.    A  vacation  home  can  qualify  as  a personal  residence  for  purposes 
       of the QPRT rules. If you aren’t willing to put your primary residence into a
       QPRT, you may be willing to do so with your vacation home, because
       anxieties about children owning the residence may not be as strong where
       a vacation home is concerned.
       2.    If you plan to move out of your residence at some foreseeable time in
       The future, a QPRT can be set up so that your retained interest terminates
       at the time  you intend to move.  For example,  if  a  55-year-old  client  who                
       lives in Colorado and plan to retire at age 65 and move to Arizona, you could
       put your Colorado residence in a QPRT and retain  the right to live in the
       residence rent free for ten years. When your retained right terminates, the
       Colorado residence will pass to the children, but since you will be living in
       Arizona by that time, you need not be concerned about living in a residence
       owned by your children.