Originally published on Forbes.com July 8th, 2014
Bill and Hillary Clinton have put the QPRT in the news. QPRT stands for Qualified Personal Residence Trust. The technique allows you to make a gift of your personal residence to a trust for a term of years. It allows you to freeze the value of your residence for transfer tax purposes. The value of your gift for transfer tax purposes is based on an actuarial computation, which represents a discount from the current market value.
A recent New Jersey Tax Court decision in the case of the Estate of Beatrice Jochman illustrates some of the ways a QPRT can go wrong. Probably the moral is that it is better to act sooner rather than later. From a political viewpoint, it might have been better to wait, but making the QPRT transfer before either of them was 65 was probably a smart move for the Clintons. The Estate of Beatrice Jochman shows what can happen if you put your QPRT formation off too long. Although the taxpayer prevailed, it was a struggle.
Beatrice Jochman was 85 years old when she set up a QPRT for a personal residence and a GRUT (Grantor Retained Unitrust) for her other assets. Both trusts had a term of 6 years. One of the key elements in planning for QPRT and similar vehicles is that they accomplish nothing if the grantor does not outlive them. On the other hand, the longer the term of the trust the deeper the discount.
Ms. Jochman outlived her trusts by eleven months. That was not good enough for the New Jersey tax authorities who argued that the transfers were in contemplation of death which would pull the trust assets into her taxable estate. It does strike me that when you get to be 85 or so, contemplating death becomes part of your routine. At some point, you probably stop buying green bananas.
During the audit of decedent’s inheritance tax return, the Director established the position that the life expectancy tables it utilized indicated that decedent could only be expected to live 5.31 years upon creation of the trusts. For that reason, both Jochman Trusts were included as part of decedent’s estate pursuant to N.J.A.C. 18:26-5.8 and assessed accordingly. However, in papers and during oral argument this position regarding actuarial timetables was abandoned …
I could see why they abandoned the 5.31 years, that is getting so precise as to be creepy.
It is undisputed that the Jochman Trusts were established exactly six years and eleven months prior to decedent’s death in 2011, and the court recognizes those trusts were irrevocable in nature by their terms. In light of the statutory provisions, the court finds the Director’s decision to include those irrevocable trusts in decedent’s estate was plainly unreasonable. The Division may not simply hang its hat on the presumption its determinations are valid when, as here, its administrative determination contradicts an ordinary reading of the applicable statute. The Director’s ultimate determination could still prove meritorious upon further inquiry, but the Division of Taxation’s determination will not be presumed correct as the court proceeds in the summary judgment analysis.
The analysis in the decision was rather complicated and lawyerly. New Jersey has a presumption that transfers made within three years of death are made in contemplation of death. The Revenue Department wanted to argue that the three years started at the end of the trust rather than when the transfer into the trust was made. That standard would make QPRTs extremely hard to execute in New Jersey. The Court was not buying it.
The Downside Of QPRTs
In the case of Ms. Jochman, even though she had an option to rent the house for 15 years after the trust termination, the house was sold after the trust terminated. If the subject of the QPRT is a residence that you want to keep living in or using, you end up having to rent it from the beneficiaries. In order for the transaction to stand up, the rental should be administered in an arms length manner. Many plans end up failing not so much from being ill-conceived, but rather from being poorly executed.
On The Clintons
The uproar over the Clintons doing a QPRT is a little silly. It is really a pretty plain vanilla technique. Their situation probably gives them the opportunity to do much more exciting things that probably do not leave as much of a public trail. Bill has been involved with private equity firms, which probably provide him with much greater opportunities to leverage his unified credit. I wonder if they did the QPRT to seem more like just plain folks.
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