Qualified Personal Residence Trusts
Similar to PRTs, QPRTs must comply with certain requirements to avoid valuation under Code Section 2702. The QPRT requirements are as follows: (i) income must be distributed to the grantor at least annually; (ii) no distributions of principal may be made to any person other than the grantor; (iii) only one personal residence may be held in the trust, but as discussed below, certain other assets may be held in the trust, as well; (iv) to the extent the trust hold cash in excess of the amount allowed, such cash must be distributed at least quarterly; (v) the QPRT status will cease if the residence is no longer used in such capacity.
QPRTs are permitted the following: (i) the residence may be sold, but not to the grantor or the grantor’s spouse (the residence may pass to the grantor’s spouse without any consideration at the end of the term); (ii) if the residence is sold, the trust may continue holding the sale proceeds, so long as the cash is held in a separate bank account; (iii) cash may be added to the trust, and then held in a segregated bank account, for the payment of certain expenses connected with the residence; (iii) the trust may permit improvements to be added on to the residence; and (iv) the grantor’s interest may be converted into an annuity, if the trust contains provisions required by Treasury Regulations Section 25.2702-3 for a qualified annuity interest.
If the residence is sold and the trust retains the cash, then the trust must provide that it will terminate as a QPRT with respect to the cash, no later than the earlier of: (i) the date that is two years after the date of sale; (ii) the termination of grantor’s interest in the trust; or (iii) the date on which a new residence is acquired by the trust. If the QPRT status of the trust terminates as to the cash, then the cash comes back into the grantor’s estate.
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