No Gift Tax on Transfer of Personal Residence to QPRT

May 18, 2009 | Roger McEowen

 

In the past, a taxpayer could sell a remainder interest in property for remainder interest’s actuarial fair market value, retain a term or life estate, and not trigger gift tax (because the sale was for fair market value, and not have the value of the life estate included in the transferor’s estate at death.  But, I.R.C. §2702 and the Regulations now require that gift tax be paid on such arrangements.  However, a recent IRS Private Letter Ruling says the prior rules apply when a personal residence is transferred to a qualified personal residence trust (QPRT).  

I.R.C. §2702 contains an exception for qualified personal residences, and IRS has ruled that a simultaneous sale of a remainder interest in a residence coupled with the transfer of the residence to a QPRT does not violate I.R.C. §2702.  So, no gift tax is triggered on the sale of the remainder interest, and it is likely that the transfer can be utilized in conjunction with a retained life estate and not cause the value of the life estate to be included in the decedent’s gross estate at death – and the retained interest need not be a term of years.  IRS didn’t specifically rule on the estate tax angle of the technique, but it’s hard to see how I.R.C. §2036 (involving gross estate inclusion of retained interests) would come into play – the remainder interest was sold for its fair market value.  The federal courts are split on that last point, but the better reasoned cases indicate no estate tax problem would result.  For those that are worried about triggering estate tax, they can stick with the traditional QPRT and use a term of years retained interest and hope that the client outlives the term.  The ruling will also likely lead practitioners to use a single QPRT for a married couple (instead of two with each QPRT containing a one-half interest in the residence).  

The sale of the remainder interest will still have income tax consequences that will have to be considered, and the buyers of the remainder interest will have to have the necessary funds to buy the interest.  So, the technique may not be available for all clients.  But, the IRS recent ruling does provide some planning opportunities.  Priv. Ltr. Rul. 200919002 (Dec. 23, 2008).