Over the past 20 years, many individuals established Qualified Personal Residence Trusts (QPRT) whereby an individual transferred title of his/her real estate to a QPRT, which essentially leveraged the value of the gift made to the trust by deducting the value of the transferor retaining use and enjoyment of the property for the term of years of the QPRT. For example, this mechanism allowed someone to transfer ownership of a million-dollar home to a QPRT, and the value of the actual gift after 20 years to the QPRT beneficiaries, depending on the facts of a particular case, may have been as low as $600,000.
Now that we have experienced an increase in the federal estate and gift tax credit ($5,250,000 per individual and $10,500,000 for a married couple) as well as a change in Michigan law allowing parents to transfer property to their children without uncapping the value of the property for property tax purposes, several individuals are reconsidering the initial planning utilizing a QPRT and taking actions to terminate the QPRT and transfer the property back to the original owners, then gifting the property to their children.
The issue concerning whether or not to terminate a QPRT mainly focuses on the entire value of the original property owner’s estate, the amount of federal estate and gift tax credit available to the original property owners, and the amount of the increase in property tax that would occur if the Michigan property were uncapped as a result of a transfer of title to the property from the QPRT to the individual beneficiaries.
For example, if the total value of a married couple’s estate, including all assets and including the value of the property in the QPRT, is less than $10,500,000, then the married couple may want to consider terminating the QPRT and then gifting the property using their gift tax credit to avoid federal tax to transfer ownership of the property to their children while they are living, and to avoid any uncapping of the value of the property for property tax purposes. This strategy will result in a transfer of ownership of the property without any federal estate or gift tax, as well as save tens of thousands of dollars of increased property tax that may otherwise apply in the event the property was transferred from the QPRT to the children as beneficiaries of that trust.
Whether or not the strategy of terminating a QPRT and transferring an ownership of Michigan property from a QPRT to the original owners, and thereafter the original owners gifting property to their children, is one that needs to be carefully considered. The facts and circumstances of each individual case need to be fully studied to determine whether this is a good idea for any particular situation.