Valuation of the QPRT

The value of the gift (the interest remaining after the life estate) is discounted at an interest rate prescribed by the IRS, based on the term of years that you select. The longer the term of years, the lower the current value of the property for gift tax purposes. Determining the value of the gift requires a complex calculation based on the length of the trust term, the current Federal Mid-Term Interest Rate and the Grantor's age. (See the example below)

The calculations involved in determining the valuation of the gift are complex. However, a rule of thumb is if the term of the trust is five years, it is likely that the value of the gift would be about 70% of the value of the property, and the gift tax would probably be about 30% of that. If, on the other hand, the trust term were ten years, the value of the gift would be closer to 50% of the present value, and the gift tax would be about 20% of that. This is a very rough estimation.

While a transfer of a residence to a QPRT is an immediate gift, requiring the filing of a gift tax return, no gift tax is usually due since the discounted value of the QPRT property typically is well within the Grantor's exemption amount. The actuarial value of the remainder interest constitutes a taxable gift made by the trust maker. Because the remainder interest is a "future interest," it does not qualify for the annual $11,000 gift tax exclusions. Thus the trust maker usually needs to allot a portion of his or her exemption equivalent of $600,000 to avoid gift tax when funding the trust.

The present value of the retained interest is computed under IRC §7520, which calls for the use of IRS valuation tables and the §7520 interest rate for the month of the transfer. When the grantor's retained interest terminates, the residence passes to the beneficiary free of additional gift tax, even though the property may have appreciated in value since the trust was created. Thus, use of a QPRT 'freezes' the value of the residence at its market value when the trust is created.

If the grantor is still living when his retained interest terminates, the residence won't be included in his gross estate for estate tax purposes (unless he continues to live in the residence without paying fair market value rent, in which case it will be included under the retained life estate rule of §2036(a)). If the grantor dies during the term of his retained interest, the residence will be included in his gross estate under the retained life estate rule. But he won't be any worse off than he would have been if he hadn't created the trust in the first place.

An example illustrates the concept. Your principal residence is worth $1 million. If you are 60 years old and transfer your residence to a 10-year QPRT, you are deemed to have made a gift of $493,030, a discount of roughly 51% of the value of the property actually transferred. The advantage of the QPRT is best illustrated by comparing this scenario to that of no QPRT. Without the QPRT, at your death the residence, which has appreciated in value to $2,665,836, is transferred to your beneficiaries after payment of $1,332,918 in estate taxes; with the QPRT, the residence is transferred at the termination of the QPRT after payment of $207,003 in gift taxes.

Age	QPRT's Term (Years)	Value of Property at Time of Gift	Taxable Gift if QPRT Utilized (1)	Gift Tax (2)	Value of Property at Death (3)	Estate Tax if QPRT Not Utilized (4)
50	5	$1,000,000	$746,200	$320,790	$3,946,089	$1,973,045
	10		$547,290	$231,281
	15		$391,140	$163,190
60	5	$1,000,000	$714,680	$306,606	$2,665,836	$1,332,918
	10		$493,030	$207,003
	15		$321,090	$133,069
70	5	$1,000,000	$651,250	$278,063	$1,800,944	$900,472
	10		$389,970	$162,687
	15		$202,290	$82,939

1. Based on IRS interest rate of 5.4%. (The higher the IRS interest rate, the lower the value of the gift)

2. Assumes applicable credit amount of $1,000,000 was previously used. Gift tax will decrease (or be eliminated) if any applicable credit amount remains.

3. Based on assumed annual appreciation of 4% and life expectancy of 85 years.

4. Based on assumed estate tax rate of 50%.

Please note that this example is hypothetical. In order to perform a current valuation, the current IRS interest rate applicable to qualified personal residence trusts must be used.