In 1990, to ensure a key home or holiday residence could pass to heirs without forcing a purchase of the residence to cover estate fees, Congress passed the QPRT legislation. That legislation allows an exception to the typical principle defined above. Consequently, for surprise tax applications, a lowering of the residence's fair industry value is permitted for the donor's kept interest.
For example, suppose a father, era 65, has a vacation residence valued at $1 million. He moves the residence to a QPRT and retains the proper to utilize the vacation residence (rent free) for 15 years. By the end of the 15 year expression, the confidence will end and the home is likely to be distributed to the grantor's children. Alternatively, the residence can remain in confidence for the benefit of the children.
Assuming a 3% discount rate for the Stirling Residences
of the move to the QPRT (this rate is published regular by the IRS), the current price of the future surprise to the kids is $396,710. This surprise, however, can be counteract by the grantor's $1 million life time surprise tax exemption. If the home grows in value at the charge of 5% each year, the worthiness of the residence upon firing of the QPRT is likely to be $2,078,928.
Accepting an house tax rate of 45%, the house tax savings is likely to be $756,998. The net outcome is that the grantor may have paid down how big is his house by $2,078,928, used and controlled the vacation house for 15 additional years, used only $396,710 of his $1 million lifetime present tax exemption, and eliminated all gratitude in the residence's value through the 15 year term from house and present taxes.
While there's something special lapse in the house and generation-skipping transfer taxes, it's likely that Congress may reinstate equally taxes (perhaps even retroactively) sometime during 2010. Or even, on January 1, 2011, the estate tax exemption (which was $3.5 million in 2009) becomes $1 million, and the most truly effective property duty rate (which was 45% in 2009) becomes 55%.
The longer the QPRT term, the smaller the gift. But, if the grantor dies through the QPRT term, the house will be cut back in to the grantor's house for house duty purposes. But because the grantor's estate may also receive complete credit for any surprise duty exemption used towards the initial surprise to the QPRT, the grantor is not any worse down than if no QPRT have been created.