Estate Planning in a Rising Interest Rate Environment: QPRTs

For years, estate planners have been crafting plans in a low interest rate environment. Recent changes in market rates have caused a shift in the different plans available to implement, including dusting off estate planning idea not seen in a few years. One example that may be worth considering in the current interest rate environment is the use of a Qualified Personal Residence Trust (QPRT).

A QPRT is used to transfer the ownership of a personal residence to one’s family, generally children. The residence is usually one’s primary residence, but a vacation home could be transferred as well. The residence is transferred in trust, and during the term of the trust you retain the right to use the residence as your home. The value of the gift of a residence into a QPRT is the value of the property less the value of the retained interest (e.g., the right to live there).

Valuing the QPRT gift

During this residence period, the right to live in the house is valued using IRS tables and the current interest rates. When interest rates rise, the value of the right to remain in the house increases. This results in a lower gift, as the higher value of the right to remain in the house is subtracted from the fair market value of the residence. So the current rising interest rate environment results in renewed interest in QPRTs.

Another way to reduce the value of the QPRT gift is for spouses to make separate (but similar) gifts to their own QPRT. Then the value of the residence is split in half, and may likely have a fractional ownership discount applied. In order to avoid the possibility of the separate gifts being combined by the IRS back into one gift, each QPRT should have different terms (e.g., a different term of years).

A few negatives

A few things to be aware of when using QPRTs in estate planning:

• If you die during the term of the trust, while you have the right to live in the residence, the residence is includable in your taxable estate. This results in no benefit to having created the QPRT, but you are no worse off for having done it.
• The QPRT is generally not left to grandchildren because it is not possible to know the Generation Skipping Tax (GST) exemption necessary at the trust’s end (which will be based on the value of the property at the end of the QPRT term).
• If you want to remain in the residence after the QPRT term ends, then you have to pay retail rent to the new trusts owners. This results in the removal of additional assets from your estate as the rent is paid. As a bonus, the residence could be held in a continuing trust, and if that continuing trust is a grantor trust, then the rent payments are not considered taxable income.

QPRTs are a tried-and-true estate planning technique used to remove appreciating assets from your taxable estate. In our current rising interest rate environment, it is time to reconsider their use in estate planning. For more information or to discuss this possible approach in greater detail, contact your Anchin Relationship Partner.