PRTs are similar by nature to other types of retained interest trusts, like GRITs, GRATs and GRUTs.
The value of the retained interest, as will be explained in more detail below, is important for gift tax purposes.
Code section 7520 values the remainder interest using the term of the trust, the life expectancy of the grantor and the 7520 rate in effect for the month of the transfer.
To the extent the residence is encumbered, the value of the property transferred will be reduced for gift tax purposes.
Some commentators suggest that the additional gifts can be avoided by having the grantor indemnify the trust for the mortgage debt.
The inability to sell the residence is a major restriction on the flexibility of a PRT and usually makes QPRTs more desirable.
Similar to PRTs, QPRTs must comply with certain requirements to avoid valuation under Code Section 2702.
The QPRT requirements are as follows: (i) income must be distributed to the grantor at least annually; (ii) no distributions of principal may be made to any person other than the grantor; (iii) only one personal residence may be held in the trust, but as discussed below, certain other assets may be held in the trust, as well; (iv) to the extent the trust hold cash in excess of the amount allowed, such cash must be distributed at least quarterly; (v) the QPRT status will cease if the residence is no longer used in such capacity.
However, it is usually prudent to include in a QPRT a contingent reversionary interest during the retained term of the trust.