Main Menu Name: QPRT
(see also: What is Reversion?)
This calculation determines the gift tax implications of establishing a grantor-retained income trust (GRIT) or qualified personal residence trust (QPRT). Through this trust, the grantor retains an income interest in irrevocably transferred property, and the remainder interest is passed to the grantor's beneficiaries. These computations can be used for both residence trusts and qualified residence trusts and for GRITs transferring property to non-family members.
In this article:
You create an irrevocable trust. You direct the trustee to pay you the income from the trust for a specified number of years or allow you possession of the trust's property. When your interest terminates at the end of the years you've selected, the property in the trust is distributed to family members or the other individuals you have chosen. In some cases, the trust continues for their benefit.
When you put cash or assets into the trust, you made what is called a "future interest" gift. The value of that gift is the excess of the value of the property you transferred over the value of the interest you kept. The value of your retained interest is found by multiplying the principal by the present value of an annuity factor for the number of years the trust will run.
For example, assuming a transfer date of 11/2022 (using Table 2010CM) and 4.8% federal discount rate, if the trust will run for ten years and $100,000 is initially placed into the trust subject to a reversion, the value of the (nontaxable) interest retained by a 65-year-old would be $48,606.
The value of the (gift taxable) remainder interest would be the value of the capital placed into the trust ($100,000) minus the value of the nontaxable interested retained by the grantor ($48,606). Therefore, the taxable portion of the grantor retained income trust gift would be $51,394. This remainder interest, by definition, is a future interest gift and will not qualify for the annual exclusion. The donor will have to utilize all or part of the remaining unified credit (or if the credit is exhausted, pay the appropriate gift tax).
The advantage of the GRIT is that it is possible for you to transfer assets of significant value to family members but to incur little or no gift tax. In the example above, the cost of removing $100,000 from the gross estate (plus all appreciation from the date of the gift) is the use of $51,394 of your constantly growing unified credit.
The GRIT is a "grantor trust." This means all income, deductions, and credits are treated as if there was no trust and these items were attributable directly to you, the grantor.
The longer term you specify the larger the value of the interest you have retained--and the lower the value of the gift you have made. However, the longer the term of the trust, the greater the probability that your death will occur during the term of the trust, and the entire principal (date of death value) must be included in the estate of a grantor who dies during the term of the GRIT since he has retained an interest for a period which, in fact, did not end before his death. If any gift tax had been paid upon the establishment of the GRIT, it would reduce the estate tax otherwise payable. If the unified credit was used, upon death within the term, the unified credit used in making the gift will be restored to the estate (if the grantor's spouse consented to the gift, his or her credit will not be restored). So the trick is to select a term for the trust that you are likely to outlive.
Quite often, the estate's beneficiary (possibly through gifts you make) will purchase life insurance on your life. Then, if you should die during the term of the GRIT, the tax savings you tried to achieve will be met through the life insurance and there would be sufficient cash to pay any estate tax.
IRC Code §2702 has severely limited the use of GRITs. Non-family members can use GRITs for any type of asset for any term. Family members will find GRITs useful only when the property transferred is a personal residence or for certain tangible property.
The regulations under §2702 allow two different kinds of trusts to hold personal residences, a "personal residence trust" (PRT) and a "qualified personal residence trust" (QPRT). A PRT is very limited and inflexible, because it must not hold any assets other than the residence and must not allow the sale of the residence. A QPRT can hold limited amounts of cash for expenses or improvements to the residence, and can allow the residence to be sold (but not to the grantor or the grantor's spouse). However, if the residence is sold, or if the QPRT ceases to qualify as a QPRT for any other reason, either all of the trust property must be returned to the grantor or the QPRT must begin paying a "qualified annuity" to the grantor (much like a grantor-retained annuity trust, or GRAT).
What is a reversion, anyway? This is easily one of the most asked technical support questions we receive.
When the grantor retains a "reversion," it means that the trust property is returned to the grantor's estate (and distributed according to the grantor's will) if the grantor dies during the term of the trust. The retention of a reversion reduces the gift to the remaindermen of the trust because of the possibility that the grantor will die during the term of the trust and the remaindermen will receive nothing. However, adding a second measuring life may increase the value of the gift to the remaindermen because the probability that both lives will end during the term of the trust is less than the probability that one life will end, so the reversion has a smaller value and the taxable remainder has a greater value.
The entire principal (date of death value) must be included in the estate of a grantor who dies during the term of the GRIT since he has retained an interest for a period which, in fact, will not end before his death. If any gift tax had been paid upon the establishment of the GRIT, it would reduce the estate tax otherwise payable. If the unified credit was used, upon death within the term, the unified credit used in making the gift will be restored to the estate(if the grantor's spouse consented to the gift, his or her credit will not be restored).
The estate’s beneficiary (possibly through gifts received from the GRIT grantor) could purchase life insurance on the life of the grantor. Then, if the grantor should die during the term of the GRIT, there would be sufficient cash to pay any estate tax.
RS regulations allow a QPRT to be converted to an annuity trust if the trust should cease to be a qualified personal residence trust at anytime during its term (if the personal residence were sold, for example).The program calculates the annuity that would have to be paid to the grant or under those circumstances. See Treas. Reg. Section 25.2702-5(c)(8)(ii)(C).
1. Transfer Date: Enter the month and year that the cash or other asset was transferred to the trust.
Note: For dates on or after January 1, 2021, you have the choice of using mortality Table 2000CM or Table 2010CM (based on Proposed Regulations released on May 5, 2022). For May or June of 2009, you have the choice of using mortality Table 90CM or 2000CM.
After June 2009, the program will automatically use Table 2000CM. For dates before May 2009 and after June 1999, the program will use Table 90CM. For May or June of 1999, you have the choice of using Table 80CNSMT or Table 90CM. For dates before May 1999 and after April 1989, the program will automatically use Table 80CNSMT. For dates before May 1989, the program uses Table LN from Treas. Reg. section 20.2031-7A(d)(6).
§7520 Rate: The program automatically enters the correct §7520 discount rate if you have kept the AFR Rates Manager up-to-date. If the AFR Rates Manager is not up-to-date, the program shows a 30% value for the selected transfer date. The program automatically rounds the rate to the nearest 2/10 of 1% as required under §7520.
Principal: Enter the value of the capital placed into the trust.
Grantor's Current Age: Enter the grantor's age as of the nearest birthday.
Second Age (0 if none): Enter a second age if a second life will also be used to determine the income interest.
Term of Trust: Enter the number of years the trust will provide income to the grantor.
With Reversion?: Select the check box if reversion is to be included. Generally, this should be checked. If reversion is not selected, the age inputs are not used. Click here to find out what reversion is. If the check box is not selected, you may select either Term or Shorter calculation types, and the 'non-reversion' values will be based off that selection.
After-Tax Growth: Enter the after-tax growth rate of the trust assets.
Comb. Death Tax Bracket: Enter a tax bracket which takes into account both the state and federal death taxes.
The Summary Tab displays the taxable portion of a QPRT. To calculate this value, the program determines the value of the interest retained by the grantor (income interest plus reversion). It then subtracts the value of the grantor's retained interest from the principal placed into the trust. The result is the taxable portion of the QPRT. The Taxable Gift, the Property Value after three years, and the Potential Death Tax Savings (Combined Bracket times [value of Property minus Taxable Gift]) are also shown in the results. Use the Factors tab to view the factors that are used in the calculation.
The "Qualified Annuity" is the annuity that would be paid to the grantor if allowed or required by the trust document upon the trust ceasing to be a qualified personal residence trust during its term (if the personal residence were sold, for example). See Treas. Reg. Section 25.2702-5(c)(8)(ii)(C).
On the Factors tab, determine these values:
1. Income Interest with Reversion: 0.48606 x $100,000 = $48,606 Retained Interest
2. Total Income Interest: 0.34710 / 4.80% (7520 rate) = 7.2313 Annuity Factor
3. Qualified Annuity: $48,606 / 7.2313 = $6,722
This is the amount that the QPRT must pay to the grantor for the balance of the 10-year term.
Note: Items (2) and (3) above illustrates the fundamental math of actuarial calculations:
Remainder Interest: Term, Life, Shorter, or Longer in the case of a CRUT
Annuity Trust: Based on combination of 7520 rate and term and/or ages
Unitrust: Based on combination of Payout Rate and term and/or ages
The 7520 rate comes into play only to determine the "Payout Sequence Factor"
when the Payment Period is other than Annual and the Months Valuation Precedes
Payout is other than 0.
Term (or Life) Interest: 1 - Remainder Interest
Annuity: Term (or Life) Interest / 7520 rate
If the term of the trust is increased, there is a greater discount for gift tax purposes, but also a greater probability of the grantor dying during the term of the trust and the trust being fully included in the grantor's estate for federal estate tax purposes. The graph shows the increasing discount for increasing terms of year (the red line showing the "Contingent Remainder"), the decreasing probability of the grantor surviving the term of the trust (the blue line showing "Probability of Survival"), and the product of those two factors, representing the net effective discount (the green line showing the "Probable Remainder").
Theoretically, the highest point on the green line should show the term of years that balances the increasing gift tax discount with the decreasing chances of surviving the term of the trust.