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1. A QPRT is an irrevocable trust. It cannot be amended or revoked
and the beneficiaries cannot be changed. Because the trust is irrevocable,
it must file annual federal and state income tax returns. The expense
and bother of these factors should be considered.
2. The property cannot be refinanced after the QPRT is created.
If the grantor needs to raise cash for any reason after creating
a QPRT, he cannot do so by mortgaging the residence as he is no
longer the owner of the residence.
3. No step-up in basis. When the residence passes to the beneficiary
at the end of the trust term, they do not get a stepped-up basis.
Instead, the grantor's basis carries over to them, so if they sell
the residence they will have to pay capital gains tax on any gains
made over what the grantor originally paid for the property plus
or minus adjustments to basis. While a QPRT forfeits the advantage
of a step-up in basis, it is important to keep in mind that the
estate and gift tax rates of 37% - 55% are much higher than the
income tax rates for long term capital gains on real property which
are 20%.
4. Should the trust maker die before the expiration of the selected
term of years, the personal residence is brought back into the trust
maker's estate at its date-of-death value. In this situation, no
tax advantages are achieved from the use of this technique. This
rule discourages the selection of an unrealistically lengthy trust
term to deflate the gift tax value of the remainder interest. There
is no adverse consequence to this since the result is the same as
if the property was never put in the trust.
5. The grantor of the trust has a predetermined limit on his right
to occupy the residence, after which time he must give up ownership
while he is still alive. The beneficiary (normally the grantor's
children) will have ownership of the residence, and the grantor
will have to pay rent to them. (If rent is not paid, the QPRT tax
advantage could be lost.) Since many people may find this to be
an awkward situation, the QPRT requires a personal decision that
should receive careful consideration.
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