Grantor Retained Interest & Qualified Personal Residence Trust

A grantor retained interest trust is a trust where a grantor makes an irrevocable transfer of assets but reserves the right to receive income from or enjoyment of those assets for a period of years. When the trust terminates, the assets are passed on to others.

A qualified personal resident trust allows for a grantor to transfer his or her house out of his estate, but continue to reside in his or her residence during the term of the trust. If the grantor survives the trust term, then the residence and any appreciation would be not be included in the grantor’s taxable estate. However, if the grantor does not survive to the conclusion of the trust, then the full value of the real estate may be included in his or her taxable estate.

With all estate planning, a DC trusts lawyer will begin with a discussion of the client’s goals, a review of the current tax laws, the size of a client’s anticipated estate, the nature of the client’s holdings, and family dynamic will be conducted to determine the available options for each client.

When to Utilize

Grantor Retained Interest Trusts (GRIT) are not used much, if at all, anymore. They are an important concept because they became the basis of other estate tax or planning opportunities, but they are not a common tool anymore for estate tax purposes.

A qualified personal residence trust is just one of many estate planning mechanisms that an attorney can offer to clients as part of their overall comprehensive estate plan.

Tax Consequences of GRIT

If the grantor survives the term of the trust and the grantor has not retained an interest in the trust property, the trust property will not be subject to the estate tax upon the grantor’s death. However, if the grantor dies during the term of the trust while he or she still has the retained right of enjoyment of the property, the entire value of the trust will be included for estate tax purposes and the grantor’s or the decedent’s gross taxable estate.

The transfer of the assets to the grantor retained interest trust is taxable for gift tax purposes, determining the amount the gift tax available, or the applicable gift tax is based on regulations of the internal revenue code and will depend on the terms of the trust and whether or not the grantor is retaining an interest for himself or for other beneficiaries.

If the grantor’s retained income interest and contingent principal interest exceeds 5% of the initial value or contributed value of the trust, the grantor is treated as the owner of the trust and the income of the trust will be taxed for the grantor for income tax purposes.

Requirements of a Qualified Personal Residence Trust

The requirements to qualify a resident’s transfer to a qualified personal residence trust tax treatment are detailed in Treasury regulation 25.2702-5, and require a consideration of the use of the real estate transferred, whether the real estate is subject to a mortgage, the nature of the real estate, and the other assets of the trust