Archive for March 21st, 2011

Below is an interesting write-up of a recent case impacting estate planning and the use of Qualified Personal Residence Trusts from one of WS+B’s Estate and Trust experts, Hal Terr.

Last week, the Tax Court ruled in favor of the taxpayer in the Estate of Sylvia Riese v. Commissioner (TC Memo 2011-60), holding that the taxpayer could avoid inclusion of a residence previously gifted to trusts for the benefit of her children through the use of a Qualified Personal Residence Trust (QPRT) from the value of her estate.

The decedent had a significant fortune and engaged estate planning advisors to reduce the value of her taxable estate.  The decedent’s attorney suggested the use of a QPRT to transfer her personal residence at a reduced transfer tax cost and during the planning of the QPRT, the attorney explained to the decedent that if she was to occupy the residence after the QPRT term she would need to pay fair market rent to the beneficiaries of the trust.  When the QPRT term ended in April 2003, the trustees of the QPRT contacted the attorney for assistance on how to determine fair market value rent for the residence.  However, during the time after the QPRT trust term ended the decedent died and no payments of rent were actually made.

Under IRC 2036, the value of the gross estate includes all property that a decedent has transferred (except in case of a bona fide sale for an adequate and full consideration) under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not end before his death—

 (1) the possession or enjoyment of, or the right to the income from, the property, or

(2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom

The IRS argued that under IRC 2036, the decedent retained possession and enjoyment of the residence without adequate consideration and as such the residence should be taxable in the decedent’s estate.   

However, the Tax Court was persuaded by the good faith testimony of the estate planning attorney and the trustees that they fully intended to determine the rent by the end of the year.  In addition, this good faith intention was supported by the fact that the discussion of the requirement for the payment of rent occurred during the implementation of the QPRT and after the decedent’s passing. 

Planning Tip: Due to the recent increase in the lifetime gift exemption to $5 million and depressed residential values, QPRTs have become a popular estate planning transfer technique for wealthy individuals.  What can be learned from the court’s decision? 

First, in the event of an untimely death, even the best planning can be undermined by poor execution.  If there is an expectation of use of the residence by the grantor after the QPRT term, have the attorney draft a rental agreement when the QPRT trust agreement is signed.  As the term of the QPRT trust nears the end, gather evidence to determine the actual fair market value rent that should be charged for the use of the residence.  When the trust term ends and the grantor is residing in the residence, the grantor should actually pay rent each month and show the transfer of cash between the grantor and owner of the residence.  With these steps, individuals may be able to avoid the extensive professional fees incurred by the Estate of Sylvia Riese  to prevent the inclusion of the residence in the decedent’s estate.

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