Of course, the replacement residence does not always have a value equal to or greater than the sales proceeds. Often, a grantor looks to downsize and purchases a smaller home, leaving the QPRT with a replacement residence and excess cash. Within 30 days following the date in which some or all of the trust loses its QPRT status, the trust agreement must provide for, or give the trustee the discretion to choose between, one of the following options:.
For those QPRTs where the grantor is also serving as trustee and the trust agreement requires the distribution of the excess cash outright to the grantor, the initial gift of the remainder interest will be an incomplete gift Regs. Further, all of the excess cash will be brought back into the grantor's estate for federal estate tax purposes. On the other hand, a conversion to a GRAT will at most lead to only some of the excess cash going back into the grantor's estate.
Consequently, only the second option is sometimes drafted into the QPRT document. Of particular note is the annuity start date. The grantor's right to receive the annuity begins on the date the original residence was sold, known as the "cessation date. This timing difference may lead to an accrual of annuity payments deferred during the time between the date the residence is sold and the date the QPRT status ceases for the excess cash.
Any deferred annuity payments must bear interest during the deferral period at a rate not less than the Sec. Will it make sense for the grantor to stay in the residence and pay rent? The grantor may want to consider other living options that would save him cash or generate income tax deductions.
For example, the grantor may have less costly alternatives such as senior housing or purchasing a smaller residence. Unless the grantor intends to rent the property on a long-term basis, thus providing the beneficiaries with an ongoing source of funds to pay for property expenses, the new owners will need to arrange to pay the bills — including real estate taxes and insurance.
Under current law, if someone holds a home in his name until his death, the cost basis for purposes of determining gain on a sale is increased to date-of-death value.
The ability of QPRTs to transfer property with a carryover basis, not a step-up in basis, makes them ideal for heirs who want to hold on to the property for generations. Under IRC Section a , basis of property is the original basis of the grantor plus any improvements made. One of the most important steps for the trustee to follow at the end of the QPRT term is to transfer title and ownership of the residence into the names of the remainder beneficiaries to ensure the correct titling and insuring of the asset.
By: Randall A. Denha, J. A few benefits of a QPRT are: 1. That said, if you still want to unwind the QPRT, what options exist: 1. Live in the house rent free which will cause estate tax inclusion 2. Paying rental income to the beneficiaries further facilitates transferring wealth to the next generation without incurring estate or gift tax. If you are in the process of estate planning or have questions about QPRTs, contact John Ure or one of our experienced estate tax advisors today at Please submit your questions using the form below.
We look forward to connecting soon. With each renewal of the lease agreement, the rental terms should be reviewed to make sure they're comparable to market. The grantor and the new owner should execute a rental agreement before the expiration of the QPRT term. The lease should state who's responsible for paying for utilities generally the renter and maintenance and repair expenses, such as gardening, snow removal and security. The owners are generally responsible for paying the real estate taxes, homeowners insurance, major repairs and improvements.
A provision requiring renters insurance is often included in leases. All of this also applies if the property is rented to someone other than the grantor. There's an advantage to the grantor staying in the home and paying fair market rent while value is being removed from the grantor's estate. If the beneficiary of the QPRT is a trust that's been set up as a grantor trust, the rental payments paid by the grantor aren't taxable to the beneficiaries, nor are these payments taxable to the grantor, who's deemed to be paying rent to himself.
Because this is disregarded as a rental activity, there will be no depreciation deduction, but the grantor will be able to deduct real estate taxes as an itemized deduction. These rental payments aren't treated as gifts. Otherwise, the rental payments are considered income to the recipient. Of course, the recipient will be able to use rental expenses and depreciation to reduce e tax bite of the rental income. But, let's suppose that in the future, there's no estate tax.
Will it make sense for the grantor to stay in the residence and pay rent? The grantor may want to consider other living options that would save him cash or generate income tax deductions. For example, the grantor may have less costly alternatives such as senior housing or purchasing a smaller residence. Therefore, to allow for flexibility, there shouldn't be a lengthy lease agreement in place. Prior to the end of the initial term, it's crucial to ensure that adequate funds are available to pay for all property expenses.
Unless the grantor intends to rent the property on a long-term basis, thus providing the beneficiaries with an ongoing source of funds to pay for property expenses, the new owners will need to arrange to pay the bills — including real estate taxes and insurance. If funds aren't readily available, it may be necessary to rent the property on a short-term basis to the grantor or a third party. Should the grantor want to sell the property during the fixed term Treas.
If there's no desire to replace the property, the sale proceeds will be converted into a qualified annuity interest within 30 days after the sale, with payments going back to the grantor or distributed outright. Under current law, if someone holds a home in his name until his death, the cost basis for purposes of determining gain on a sale is increased to date-of-death value.
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