Robert Burns wrote that "The best laid schemes o' Mice an' Men, Gang aft agley, An' lea'e us nought but grief an' pain ....." In the tax planning area, the best laid schemes go astray if they are not followed up on.
A qualified personal residence trust ("QPRT") is an arrangement under which ownership of property is transferred to beneficiaries at some future time. The fact that the gift is effective in the future reduces the transfer tax cost of the gift. The gift may be further conditioned on the donor's being alive when the gift takes effect.
Sylvia Riese executed a QPRT providing that at the end of three years title to her house would pass to her daughters if Sylvia were still alive. When the trust term ended she continued to live in the house until she died a few months later.
The IRS audited Sylvia's estate tax return and asserted that since she had not paid rent after the trust ended she and her children must have had an understanding that Sylvia had retained the right to live in the house. Section 2036 of the Internal Revenue Code provides that if you give something away and retain "the possession or enjoyment of, or the right to the income from, the property ..." it will be included in your estate for estate tax purposes.
The IRS claimed that the estate owed an additional $3,114,357 in estate taxes because the house should be included in the taxable estate. The executor was able to show that there was an understanding that Sylvia would pay rent of $7,500 per month, and that she intended to sign a lease and would have done so but for her death.
The Tax Court judge accepted the argument that Sylvia intended to pay rent and held that the house was not includible in Sylvia's estate under Section 2036 and the estate did not owe $3,114,357. This was a very close case and the decision could have gone the other way. If a lease had been signed when the trust term ended, there would have been no problem with the IRS.
Your estate plan should be reviewed annually to make sure it is on track. We will be glad to assist you to receive the results you want.
