13. Qualified Interest Trusts Flashcards
Chapter 14 Grantor Interest Trust
A grantor transfers property into a trust but retains some right of enjoyment of the property, usually income.
If the transferor survives the income period, all beneficial interest in the trust ceases.
Chapter 14 Value of GRIT Taxable Gift
Taxable gift = FMV of the property - value of the grantor’s retained interest.
This equals the value of the remainder interest that is considered a gift.
Chapter 14 Section 2702 Limits on Advantage to GRIT
Values the retained income interest at zero
when
- transfer is made for the benefit of a member of the transferor’s family, and
- an interest is retained by the transferor or an applicable family member
Ch. 14 S 2702 Applicable Family Member
Ancestors, but no descendants!
- transferor’s spouse
- ancestors of the transferor or the transferor’s spouse, and
- any spouse of such ancestor
Ch. 14 S 2702 Member of Transferor’s Family
- spouse
- siblings
- ancestors
- descendants
- ancestors and descendants of spouse
- spouses of transferor’s ancestors, descendants, and siblings
Ch. 14 - When GRIT Retained Interest is set at Zero
the remainder interest will be valued at FMV as if an outright gift had occurred
Chapter 14
Sect. 2702 Exceptions to the Zero Rule
Section 2702 carves out exceptions from the zero value rule (thus providing a value for the retained interest) for
- qualified personal residence trusts (QPRTs),
- grantor retained annuity trusts (GRATs),
- grantor retained unitrusts (GRUTs), and
- tangible personal property trusts.
Remainder interests can be given to family members for these types of trusts and will escape the zero valuation rules in Section 2702
Personal Residence Trusts (PRTs) and Qualified PRTs (QPRTs)
Definition
The grantor (term holder) transfers a personal residence to a trust and retains the right to live in the residence during the trust term.
PRTs and QPRTs - How many residences?
The trust may have an interest in only one residence.
PRTs and QPRTs: Benefit
The benefit is that the value of the gift will be equal to the FMV of the house discounted for the number of years of the term of its trust at the applicable Section 7520 rate.
This is used most effectively when the property is expected to appreciate rapidly.
PRTs and QPRTs: Who may occupy?
The property cannot be occupied by someone other than the term holder and family.
May property in PRTs and QPRTs be subject to a morgage?
The property may be subject to mortgage.
PRTs and QPRTs: Permitted recipient of trust income
The trust prohibits distribution of trust income to anyone but the term holder.
May PRTs and QPRTs convert to a Qualified Annuity Interest?
At the option of the term holder, the trust may convert to qualified annuity interest (GRAT).
May Grantor rent or repurchase property in PRTs and QPRTs?
The house can be rented or repurchased by grantor (term holder) after trust term
QPRT for Vacation Home
QPRT may be an appropriate estate planning technique for a vacation home
PRT and QPRT: May the Grantor be the Trustee?
Grantor may be the Trustee
Who pays all expenses with the residence in a PRT/QPRT?
The term holder pays all expenses (taxes, insurance, repairs, maintenance, etc.)
If it contains a small amount of cash, to whom may a QPRT distribute income?
Grantor only
How may a QPRT residence be sold and proceeds reinvested?
If certain requirements are met
Difference between a PRT and QPRT
PRT may not
- hold cash
- sell residence and reinvest proceeds
GRAT: Who pays income tax?
Taxed to grantor during lifetime for income tax purposes
GRAT: Gift
Gift = Value of the transferred property - PV(retained income interest) at time of creation
GRAT Remainder
Remainder passes to noncharitable beneficiaries (typically family members) at end of income term
When does a GRAT offer the greatest transfer tax advantage
When the value of the trust property grows at a rate greater than the Section 7520 rate (used to calculate the value of the remainder interest)
GRAT Payment requirement
Makes fixed payments to grantor at least annually
GRAT usual situation
Used with a family member and where the transferor has a better-than-average probability to outlive the term of the trust
GRAT Qualified retained income interest
Qualified retained income interest is not valued at zero for purposes of Section 2702
Grantor Retained Unitrust (GRUT)
Makes payments at least annually of a fixed percentage of the net FMV of the trust assets as determined annually
All other characteristics are like a GRAT
