Estate and Elder Law

QPRTS and PRTS: Planning Strategies for Transferring Family Homes

As an alternative to gifting direct interests in a family home to children, a donor can establish an inter vivos trust for the benefit of children or other family members and make gifts of interests in the property to such a trust during life. There are many different types of trusts that a donor should consider. In this Analysis, Nancy G. Henderson discusses two: a Qualified Personal Residence Trust (QPRT) and a Personal Residence Trust (PRT). She writes:

Personal Residence Trusts (PRTs)

     Although QPRTs are the most favored choice, the Code and applicable regulations also exempt Personal Residence Trusts, or "PRTs" (also sometimes referred to as "Non-Qualified Personal Residence Trusts"), from the special valuation rules of Section 2702. The rules governing PRTs are similar, but not identical to those applicable to QPRTs. Therefore, in some specific instances, PRTs are superior to QPRTs for transferring family homes.

     PRTs are more restrictive than QPRTs in that they can hold only a personal residence (or an interest in a personal residence). They can hold no cash at all with the limited exception of "qualified proceeds" from the involuntary conversion or destruction of the property by fire or casualty. Like a QPRT, any such "qualified proceeds" must be reinvested in a new personal residence within two years of the date of receipt. In addition, the trust document must prohibit the sale of the residence (other than by destruction or involuntary conversion) and must restrict its use to that of the personal residence of the grantor.

     The primary benefit of using a PRT as compared to a QPRT is that the Regulations do not expressly prohibit the commutation of the term and remainder interests in a PRT. Thus, if it becomes desirable to terminate the PRT before the end of its term, such as because it appears that the grantor may not survive the trust term (so long as the grantor's condition is not imminently terminal, which could render the mortality tables inapplicable) or because the proceeds of a casualty or involuntary conversion will not be reinvested in a new residence within two years, the grantor and the remainder beneficiaries should be able to agree to the early termination of a PRT and the division of the trust assets in proportion to the actuarial values of the term and remainder interests. As a result of any such termination, the grantor and the remainder beneficiaries would jointly own the property as tenants in common (or in some other form of joint ownership, such as in an LLC).

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