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Should I unwind my qualified personal residence trust?

When the economy dips, it's not uncommon for real estate that has been transferred to a QPRT to appreciate at a rate that's less than what was assumed and planned for when the trust was formed. Consequently, one of the purposes of the QPRT--removing future appreciation from an estate--may go unachieved. Faced with this situation, you may be inclined to "unwind" (undo) the QPRT. That, however, may not be the best option.

If you unwind the QPRT, you will have wasted any payment of federal gift tax or use of the gift and estate tax applicable exclusion amount associated with the original transaction.

For example, say you transferred your primary residence valued at $500,000 to a QPRT with a 20-year term when you were 40 years old and the Section 7520 rate was 3%. The QPRT provides that if you die during the 20-year term, the primary residence reverts to you. Otherwise, the primary residence passes to your children at the end of the 20-year term. You made a gift of approximately $251,505, and you either paid gift tax on that amount or you used up $251,505 of your $5,340,000 (in 2014) gift and estate tax applicable exclusion amount. Either way, you will have squandered that amount because you won't get it back when you unwind the QPRT.

You may be better off keeping the QPRT. Even if there will be zero appreciation in the property, you might still enjoy some tax savings if you let the QPRT continue. That's because when the gift was valued at the time the property was placed in trust, the calculation assumed there would be no appreciation in the property; additionally, there was a discount because of the possibility you might die during the trust term. So, if you outlive the trust term, you will still enjoy the benefit of that discount.

Not only that, but when the QPRT terminates, you will have to pay the remainder beneficiaries fair market rent if you wish to continue living in the residence. These payments will reduce your estate even further.

That said, if you still want to unwind the QPRT, your best option may be to invalidate the QPRT by ceasing to use your home as a primary residence (a requirement for a valid QPRT). How? You might sell the home or rent it out. It's important to get professional legal advice before taking any action.

IMPORTANT DISCLOSURES Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2020.