A Qualified Primary Residence Trust (QPRT) is a great estate planning structure. But how much do you know about the QPRT calculation and formula?
In this guide, we will discuss how a QPRT is calculated and discuss the actuarial formula. It is not simple, so make you have a professional do it for you.
Table of contents
The QPRT is an excellent opportunity to partially utilize a client’s lifetime exemption painlessly and effectively. It is painless because it does not involve the use of cash or liquid assets and because the transfer of the home to the QPRT will have little outward effect on the grantor. It will be effective because the actuarial discounting will result in an eventual transfer of the home to children at a gift tax value only a fraction of the actual home value.
Please note that if the house is not repurchased and passes to the children at the end of the QPRT term, their tax basis will be the same as the grantor’s. You must consider whether the estate tax saving in such a case outweighs the potential basis step-up which occurs if the house is held until death.
The creation of a QPRT is a taxable gift, but for qualifying QPRTs under the current law, the amount of the taxable gift is the total value of:
- the property transferred; less
- the actuarial value of the income interest retained by the grantor.
Stated differently, the taxable gift is the present value of the remaindermen’s expectation of receiving the trust property at the end of the trust term.
For purposes of computing present values and other actuarial factors, the IRS requires the use of a published discount rate which is changed monthly. The rate, which for purposes of this example is 4.0%, is determined by taking 120% of the average yield over the prior month on mid-term U.S. Treasury securities.
Using the discount rate of 4.0% and assuming a personal residence with an appraised value of $1,000,000, the following table illustrates the taxable gift component of QPRT’s for various terms and ages:
QPRT remainder interest calculator
Here are the required assumptions and links to get the information:
|Age (nearest birthday) at date of transfer||N/A|
|Trust term in whole years||N/A|
|IRC section 7520 interest rate||Section 7520 Interest Rates | Internal Revenue Service|
|FMV of residence||N/A|
|Value based on donor’s age at beginning of trust term||Table 90CM Mortality Table|
|Value based on donor’s age at end of trust term||Table 90CM Mortality Table|
|Remainder interest factor (actuarial table B)||Actuarial Tables | Internal Revenue Service|