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Table
of Contents for the
First Edition of Natalie Choate's Book, The QPRT Manual
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Abbreviations, Acronyms, and Symbols |
Select chapter names to view a detailed table of contents. |
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Abbreviations, Acronyms, and Symbols |
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Introduction |
Why QPRTs Are the Ideal Estate Tax Shelter |
Chapter
1 |
1.1 How to Save $1 Million of Estate Tax on a $1 Million Asset1.1.01 The story of Jeanette and her $1 million condo 1.1.02 The QPRT valuation discounts 1.1.03 Using life insurance to complement the QPRT 1.1.04 What a qualified personal residence trust (QPRT) is 1.1.05 The ideal QPRT client (and who should avoid QPRTs) 1.1.06 The older the client is, the better 1.1.07 The wealthier the client is, the better 1.1.08 Only for clients seeking to benefit their descendants 1.1.09 Importance of donor’s reasonably good health 1.1.10 Donor expects to remain in his valuable residence 1.1.11 Drawbacks and limitations of the QPRT 1.1.12 Impact of future estate tax repeal and reinstatement 1.2 History: from GRITs to PRTs and QPRTs1.2.01 QPRT’s ancestor: the GRIT 1.2.02 Special valuation rules of § 2702 (almost) kill GRITs 1.2.03 IRS regulation “interprets” § 2702 1.2.04 The Personal Residence Trust (PRT) 1.2.05 The Qualified Personal Residence Trust (QPRT) 1.3 Transfer Tax Fictions and How QPRTs Exploit Them1.3.01 The transfer tax system and its necessary fictions 1.3.02 Fair market value fiction 1.3.03 Discounting to present value: the time value of money 1.3.04 The § 7520 rate fiction 1.3.05 Effect of high or low § 7520 rate on QPRTs 1.3.06 The fiction of constant asset value 1.3.07 Valuing interests with actuarial contingencies 1.3.08 Average life expectancy fiction 1.3.09 Science fiction: the discount for probability of survival 1.4 Alternatives to a QPRT1.4.01 Grantor retained annuity trusts (GRATs) 1.4.02 GRATs, QPRTs, the residence; how to choose 1.4.03 Gifts of fractional interests; valuation discounts 1.4.04 Gifts using entities such as limited partnerships 1.4.05 Split purchase of life estate and remainder 1.4.06 “Freezing” value with a sale to a grantor trust
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Chapter
2 |
2.1 Definition of “Donor’s Personal Residence”2.1.01 The big two “primary use” tests 2.1.02 The principal residence: § 1034 2.1.03 An “other” (nonprincipal) residence: § 280A(d)(1) 2.1.04 What structures, interests, qualify as “residences?” 2.1.05 Numerical limits on residences in QPRTs 2.1.06 Co-op form of ownership 2.1.07 Foreign residence 2.1.08 Continuing care arrangements; timeshares 2.2 Occupancy Tests: Who Must, May, May Not Use the Residence2.2.01 Occupancy shared with family, guests, staff 2.2.02 Occupancy shared with paying tenants 2.2.03 If others (paying or not) occupy in donor’s absence 2.2.04 Residence held for donor’s use: nursing home problem 2.2.05 Definition of “dependent” 2.3 Gifts of Fractional Interests in Residence2.3.01 Regulation permits QPRT for fractional interest 2.3.02 Shared occupancy issues raised by co-ownership 2.3.03 Advantage: gift tax valuation discounts 2.3.04 Multiple QPRTs with different expiration dates 2.3.05 Spouses create separate QPRTs for same residence 2.3.06 To give donor’s children independent occupancy rights 2.3.07 Donor owns the portion not owned by the QPRT 2.3.08 Who should use, not use, fractional-interest QPRTs 2.4 Property with Some Nonresidential Use2.4.01 Transient lodging with services: bed-and-breakfast 2.4.02 Home office, day care center examples 2.4.03 Other commercial or nonresidential use 2.4.04 Easements for conservation, historic preservation 2.5 ...And Nothing but the Residence!2.5.01 Fixtures ok, furnishings not ok 2.5.02 “Adjacent land”: Larger acreage 2.5.03 “Adjacent land”: multiple lots 2.5.04 Appurtenant structures 2.6 Financial, Legal, Personal, and Tax Factors2.6.01 Residence has low value or low income tax basis 2.6.02 Local law: perquisites, restrictions, transfer costs 2.6.03 Title and homeowner’s insurance issues 2.7 If Residence Is Subject to a Mortgage2.7.01 The problem with a mortgage on a QPRT residence 2.7.02 Best solutions: pay off mortgage; interest only loan 2.7.03 Treat donor’s mortgage payments as loan to trust 2.7.04 Workable if tweaked: each beneficiary pays his share 2.7.05 Doubtful but popular: donor promises to pay mortgage 2.7.06 Due-on-sale clause; income tax considerations |
Chapter
3 |
3.1 Setting QPRT Term and Donor’s Reversion3.1.01 The two phases of the QPRT term: QPRT and GRAT 3.1.02 How long can the QPRT term be? 3.1.03 Which is better, a short term or a long one? 3.1.04 Expert tips on how to set the QPRT term 3.1.05 Donor’s death during term; retaining a reversion 3.1.06 Reasons not to retain a reversion 3.1.07 What rights or powers constitute a “reversion?” 3.1.08 Options for disposition on donor’s death during term 3.2 IRS Rules on Provisions During Term3.2.01 Summary of required and permitted provisions 3.2.02 QPRT may hold cash for certain expenditures 3.2.03 Allowing trust to divide into multiple trusts 3.2.04 Sale of residence by the QPRT; sale proceeds 3.2.05 Insurance policies, proceeds; condemnation awards 3.2.06 Commutations prohibited 3.2.07 Sale of residence to donor, spouse, prohibited 3.3 Cessation of QPRT Status During Term3.3.01 When “QPRT status” ends: sale of residence 3.3.02 Cessation of QPRT status: casualty, condemnation 3.3.03 Cessation of QPRT status: other reasons 3.3.04 Three options upon cessation of QPRT status 3.3.05 Options 1 and 3 precluded if the donor is the trustee 3.3.06 Option 2 is best even if the donor is not the trustee 3.4 Conversion to a GRAT3.4.01 When the annuity payments begin 3.4.02 Interest and income during annuity deferral period 3.4.03 Other required GRAT provisions 3.4.04 Making GRAT distributions in kind 3.4.05 Language attempting to limit estate inclusion 3.4.06 Multiple GRAT conversions in one QPRT 3.5 Other Drafting Issues for the QPRT Term3.5.01 Donor as trustee: during QPRT term 3.5.02 Allocation of expenditures to income or principal 3.5.03 If all non-skip beneficiaries or issue die during term 3.5.04 Spendthrift provision; preserving “amendability” 3.5.05 Other ways to preserve “amendability” 3.5.06 Provisions anticipating estate tax repeal 3.5.07 Holding title in a nominee trust or other nominee 3.6 Provisions During Life of Donor’s Spouse3.6.01 After term, keep property out of parents’ estates 3.6.02 Reasons to benefit spouse; but which spouse? 3.6.03 Give spouse a life estate in the trust 3.6.04 Drafting issues when giving spouse a life estate 3.6.05 Spray trust for spouse and issue 3.6.06 Giving spouse power to change disposition: overview 3.6.07 Income to donor via exercise of power 3.6.08 Income or use to donor upon lapse of power 3.6.09 Do not give spouse a general power of appointment 3.6.10 Give no one power to appoint principal to donor 3.6.11 Spousal power to appoint to persons other than donor 3.7 Donor’s Life after QPRT Term3.7.01 Donor leases residence or retains right to do so 3.7.02 Should property pass outright to children or in trust? 3.7.03 Choices for dispositive provisions of ongoing trust 3.7.04 Default of issue after QPRT term 3.7.05 Choice of trustee after QPRT term; § 2036–§ 2038 3.7.06 Donor retains option to buy, veto, or first refusal |
Chapter
4 |
4.1 Gift and Estate Tax Essentials4.1.01 The “unified” tax on lifetime and at-death transfers 4.1.02 How the gift tax works 4.1.03 How the estate tax works 4.1.04 How Code avoids double tax on estate-included gifts 4.2 QPRT Computations4.2.01 Subtraction method replaces “fair market value” 4.2.02 Information needed and where to find it 4.2.03 How to calculate the QPRT gift value 4.2.04 Calculation of GRAT payments (total conversion) 4.2.05 Can the GRAT conversion itself constitute a gift? 4.2.06 Calculation of GRAT payments: partial conversion 4.3 Various Gift Tax Issues4.3.01 Gift tax return: due date, how to report QPRT gift 4.3.02 Marital deduction, annual exclusions do not apply 4.3.03 Gift tax statute of limitations 4.3.04 Donor’s payment of expenses during the QPRT term 4.3.05 Improvements; additional gifts during QPRT term 4.4 Additional Issues for Married Donors4.4.01 Married U.S. donors allowed to “split” some gifts 4.4.02 Why spouses should not split QPRT gifts 4.4.03 Couple must split all qualifying gifts or none 4.4.04 Make QPRT not qualify for splitting? Life insurance? 4.4.05 When the residence is jointly owned 4.4.06 Who is the donor? “Step transaction” problems 4.4.07 Simultaneous QPRTs and “reciprocal trust” doctrine 4.4.08 § 2036 and spousal joint tenancy 4.4.09 Which spouse should create the QPRT? 4.5 Creditors’ Rights and the Estate Tax4.5.01 Assets reachable by donor’s creditors: estate tax effect 4.5.02 Basic effects of this rule on QPRTs 4.5.03 Creditors can probably force GRAT conversion 4.5.04 Application to PRTs 4.6 Other Estate Tax Issues4.6.01 Estate inclusion if donor dies during the term 4.6.02 Estate tax apportionment if donor dies during term 4.6.03 Limiting estate inclusion after GRAT conversion 4.6.04 Donor’s rent-free use causes estate inclusion |
Chapter
5 |
5.1 Generation-skipping Transfer Tax Essentials5.1.01 Overview of the GST tax 5.1.02 Which gifts, bequests, trust events, are GST-taxable 5.1.03 Exceptions: annual gifts; medical, tuition expenses 5.1.04 The “deceased parent” exception 5.1.05 The GST exemption and how it gets allocated 5.1.06 Illustration of allocating GST exemption to a trust 5.1.07 Effect of timely, late, allocation of GST exemption 5.1.08 How GST exemption affects trust: the inclusion ratio 5.1.09 Planning techniques for the GST tax 5.1.10 Avoid inclusion ratios between zero and one 5.1.11 How to avoid partial inclusion ratios 5.2 The QPRT-GST Tax Dilemma5.2.01 ETIP rule: No exemption allocation until end of term 5.2.02 QPRTs and the deceased parent exception 5.2.03 Retroactive allocation rule does not help 5.2.04 Fixing a QPRT left to “issue” 5.2.05 How to (and how not to) solve QPRT-GST puzzle 5.2.06 Who uses/should use which QPRT-GST Approach? 5.2.07 Three issues that arise with all four Approaches 5.3 Approach #1: Spray Trust for Issue5.3.01 QPRT remainder passes to “spray” trust, if necessary 5.3.02 Risks, limitations, and drawbacks of Approach #1 5.4 Approach #2: Leave to Living Children Only5.4.01 Leave QPRT only to non-skip persons 5.4.02 Drawback: how compensate issue of deceased child? 5.4.03 Drawback: what happens if all children die 5.5 Approach #3: Force Share into Child’s Estate5.5.01 Force asset into gross estate of deceased child 5.5.02 Changing the “transferor” for GST tax purposes 5.5.03 Risks, limitations, and drawbacks of Approach #3 5.5.04 Provide that child’s share passes to his estate? 5.5.05 Give child a general power of appointment? 5.6 Approach #4: Separate Share for Each Child5.6.01 Create separate shares, one for each child 5.6.02 The separate and independent share rule 5.6.03 Risks and drawbacks of Approach #4 5.7 Automatic Allocations; EGTRRA Sunset5.7.01 Automatic GST exemption allocation rules 5.7.02 Automatic allocation at end of QPRT term-ETIP 5.7.03 Automatic allocation rules affect pre-existing QPRTs 5.7.04 Effect of GST tax repeal, EGTRRA sunset provisions |
Chapter
6 |
6.1 Grantor Trust Status6.1.01 Grantor trust rule essentials 6.1.02 Transactions between grantor and grantor trust 6.1.03 Advantage of grantor trust status: during QPRT term 6.1.04 How to assure grantor trust status during QPRT term 6.1.05 Grantor trust status: after the term ends 6.1.06 Income tax reimbursement language 6.1.07 Risks: legislative change, “abuse” provisions 6.1.08 Gain realized on termination of grantor trust status? 6.2 Income Tax Reporting Requirements6.2.01 Grantor reports income and deductions on his 1040 6.2.02 Trust’s reporting requirements 6.2.03 Best method: No trust return 6.2.04 Traditional method: Form 1041 plus statement 6.2.05 Worst method: reporting on Form 1099 6.2.06 Changing methods; year of grantor’s death; penalties 6.2.07 Does a QPRT need a TIN? 6.3 Other Income Tax Issues6.3.01 Income tax basis, rental income, depreciation 6.3.02 Fractionalization of basis does not apply 6.3.03 Drawback of giving low basis property 6.3.04 Exclusion of gain on sale of principal residence 6.3.05 § 121 after donor’s death: surviving spouse 6.3.06 § 121 after donor’s death: in year 2010 |
Chapter
7 |
7.1 Ways to Undo a QPRT Gift7.1.01 Reforming a QPRT 7.1.02 Qualified disclaimer to reverse QPRT gift 7.1.03 Donor’s poor health: gift or sale of retained interests 7.1.04 Donor’s poor health: commutation of trust interests 7.1.05 Donor remarries 7.1.06 Decline in donor’s financial circumstances 7.2 Various Transactions During the QPRT Term7.2.01 Renting the residence to others 7.2.02 Improvements to the residence 7.2.03 Selling the residence and buying a new one 7.2.04 Donor buys residence back from the QPRT 7.2.05 Mortgaging the residence (or borrowing unsecured) 7.2.06 Sell residence, convert to a GRAT 7.3 Various Transactions: After the Term7.3.01 Donor buys house back after term 7.3.02 Donor rents house back after term 7.3.03 If the donor does not want to (or cannot) pay the rent |
Chapter
8
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8.1 Wendy Wigglesworth: Wealthy Widow8.1.01 Widow with four children, one house, lots of cash 8.1.02 Why a QPRT appeals to Wendy Wigglesworth 8.1.03 QPRT for the principal residence 8.1.04 Example of equalizing clause in will 8.2 The Tutwilers: Married Donors8.2.01 Married couple, three residences, one an heirloom 8.2.02 Tina’s QPRT for the heirloom home 8.2.03 Matching spousal QPRTs for the principal residence 8.2.04 Tom’s QPRT for the Florida condo 8.3 The Ponds: Only Child8.3.01 A QPRT for an only child
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Appendix A: QPRT Resources |
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Appendix B: Forms |
Form 1: Sample Qualified Personal Residence Trust Form 2: Summary of Qualified Personal Residence Trust Form 3: Sample Statement to Attach to Gift Tax Return |
Appendix C: QPRT Private Letter Rulings |
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Appendix D: QPRT Drafting Checklist |
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Bibliography |
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Index |
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