MY PERSONAL RESIDENCE IS NOW SET UP IN A "QPRT" IN ITS FOURTH YEAR
WITH EIGHT YEARS REMAINING.  WE NOW WANT TO SELL IT AND REPLACE IT ITH
A LESSOR VALUED ONE ONE AND PLACE IT IN THE "QPRT'.  MY QUESTION IS
THIS POSSSIBLE ND HOW SHOULD THE ADDITIONAL MONEY FROM THE SALE BE
PLACED IN THE "QPRT".

Dear jimbo913-ga:

Thank you for your question. Unfortunately, under Federal tax laws, it
is not possible to sell your residence that is placed under a QPRT.
The QPRT trust is irrevocable. Legally speaking, the residence that is
now in the QPRT is no longer your property, but that of your heirs.
Upon creating the trust, the residence is regarded as a gift from you
to your heirs. The QPRT simply guarantees your right to hold that
property as your personal residencee for a limited amount of time.

"For estate tax purposes, the creation of a QPRT results in the
creation of two specific interests: 1) the right of the parent to
continue to live in the residence for the initial term, and 2) the
right of the children to receive the residence after the initial
term."
Source: http://www.reish.com/publications/article_detail.cfm?ARTICLEID=260

The trust is irrevocable. You may not purchase the residence from your
heirs prior to the end of the term of the trust.
Source: http://www.gcwf.com/articles/estate/estate2.html

In addition, money in addition to operating and maintenance costs can
not be placed in a QPRT:

"It must not contain assets other than a personal residence. However,
it can contain a limited amount of cash for operating expenses. The
personal residence must be the term holder's principal residence or
one other residence of the term holder."
Source: http://financialcounsel.com/Articles/EstatePlanning/ARTEST0000034-QPRTVariations.asp

If you could provide me with your location information, I will provide
you with references to registered estate tax consultants in your area
for further information. As is noted below, Google Answers provides
general information, and is not intended to substitute for informed
profession tax advice.

 
Google Search Strategy:

        QPRT
    ://www.google.com/search?hl=en&lr=&ie=UTF-8&oe=UTF-8&safe=off&q=QPRT&btnG=Google+Search

If you need any clarifications, please don't hesitate to ask. I would
be more than happy to assist you further.

Best Regards,
blader-ga

to:  Richard-ga  please answer my question

Jimbo:  Thanks for giving me an opportunity to answer your question.

As you see in my comment below, you simply need to have your trustee
make the sale and purchase.  If there are leftover funds after that,
your trustee is required to invest the funds (that is, open some sort
of bank or brokerage account in the name of the trust) and to pay you
an annuity for the 4 remaining years.  When the 4 remaining years are
up, the balance of that fund is disposed of along with the residence
to whomever the trust document says should receive it.

[There's one area where my comment was imprecise--I told you that
after the next 4 years, the remaining money and your house will
continue to be held in the trust.  That's true if the trust document
says that a further trust is created; actually you'll have to read the
trust to see what is required to be done with the trust property at
the end of the inital term.  Maybe it continues in trust for your
spouse or children (or somebody else) or maybe it goes outright to
them.]

Now I'll address the additional questions that you asked:

CAN THE BUYER BE ONE OF THE [remainder beneficiaries] OF THE TRUST?
I'm not aware of any legal prohibition, but be sure to read the trust
document to be sure there's no rule against it in the trust.

     1: A NEW RESIDENCE IS PLACED IN THE TRUST FROM DOWN PAYMENT 
      Suppose your home is worth 200,000 and you're thinking of
trading down to a 150,000 property.  You're suggesting that the trust
remainderman, say your child, would pay the trust maybe $20,000 cash
plus a $180,000 mortgage note for your home, and the trustee would
make a $20,000 downpayment on the 150,000 replacement plus take out a
$120,000 mortgage to complete the purchase.
      I don't think the trustee can do this, because it means that the
trustee ends up holding not just the replacement residence, but also
the remainderman's $180,000 mortgage note.  This is contrary to the
regulations:
"A personal residence trust is a trust the governing instrument of
which prohibits the trust from holding, for the original duration of
the term interest, any asset other than one residence to be used or
held for use as a personal residence of the term holder ...). "
   Treasury Reg. 26 CFR 25.2702-5
http://tinyurl.com/v3c

     2: CAN THE TRUST TAKE BACK A MORTGAGE  OR DO A CONTRACT SALE 
        WITH A BALLOON PAYMENT AT TERINATION OF TRUST
No, for the reason given above--the trustee isn't supposed to own
anything but the residence itself.  If the trustee uses a mortgage to
buy the new residence, he ends up holding excess cash which he's not
allowed to have.

     3:  CAN RECEPIENT ELECTED TO GIVE UP HIS RIGHTS IN THE TRUST  
        AS PART OF THE PURCHASE FOR CONSIDERATIONS OF THE PURCHASE
No--besides the prohibition discussed above, there's a real risk that
the IRS would treat the relinquishment of those rights as a TAXABLE
GIFT.
 
     4: HOW WOULD THE MORTGAGE INTEREST BE HANDLED
What you describe is back-to-back loans, that is, the trust owes the
mortgage on the new property (it had to borrow because it only had as
much cash as the buyer gave it as the down payment), and it holds a
mortgage from the sale of the old property (which it's not allowed to
do).  I suppose the trust would have interest income from the mortgage
it holds, and interest expense from the mortgage it pays.  Both of
these would appear on your personal return for the next 4 years,
because as stated in my comment the trust is a grantor trust.  After
that the trust would have to file federal income tax return form 1041
to report its interest income and expense.  But again, it's contrary
to the regulation for the trustee to structure the transaction in a
way that leaves him holding extra cash....


I hope you find this answer useful.  I'd suggest that you should keep
to the simple route.  So if the current residence is worth 200,000 and
you'd rather sell it and buy a 150,000 residence in its place, simply
have the trustee do so.
The trustee should sell to an unrelated party for 200,000 in cash
(rather than via a purchase money mortgage for the reasons given
above), and the trustee should use that cash to buy the replacement
residence, again for cash, and invest the remaining 50,000 out of
which you will receive your annuity.

Good luck!
richard-ga

---

Clarification of Answer by richard-ga on 25 Jul 2002 19:16 PDT

I just noticed that your QPRT has 8 years remaining.  Somehow I had
the idea that it had only 4 years to go.  My answer is the same, but
when I say "4 remaining years" I really mean "8 remaining years."
Sorry for the confusion.
richard-ga

---

Clarification of Answer by richard-ga on 26 Jul 2002 10:30 PDT

For further response to this question and a suggestion of how the
beneficiary can be the buyer in two steps, so that he ends up paying
for the 4/5ths of the interest that won't otherwise pass to him,
please see your followup question and my answer at:
QPRT
https://www.answers.google.com/answers/main?cmd=threadview&id=45089

Sorry, but blader's answer is not correct, except in a narrow sense.
It's true that "you" can't sell the residence, because it's the
trustees of your trust who own it.  But they can sell it and they can
buy the replacement residence for you:

1.  Because the initial term of the trust is still running, your trust
is a grantor trust, and any gain on the sale is reportable by you (but
you get the normal benefit of having the first $250,000 of gain
excluded).

2.  The trustees will receive the sale proceeds, and they can buy a
new residence for you in the name of the trust (presumably you'll
select the home that you want them to buy).  The trust will continue
as before.

3.  The excess proceeds (the cash left over after they buy the
replacement residence) will be invested by the trustees on behalf of
the trust.  Since there are 4 years remaining in the trust term, the
trustees will pay you an annuity for the remaining four years. 
They'll need to refer to the IRS ruling cited below to see how the
annuity is calculated.

4.  At the end of those four years, the remaining money and your house
will continue to be held in the trust, and your free use of the
property and your annuity will end.

IRS PLR 200010013
http://www.irs.gov/pub/irs-wd/0010013.pdf

It is important to note that the trustees can only do what the trust
permits. Thus, to see if the terms richard refences are available, it
would be necessary to look to the language of the trust instrument.

The governing tax regulation is published as 26 CFR 25.2702-5, and is
online at http://squid.law.cornell.edu:9000/cgi-bin/get-cfr.cgi?TITLE=26&PART=25&SECTION=2702-5&TYPE=TEXT
. See, in particular, subsection (c)(5)(ii) and subsection (c)(7)(ii).

Dear richard-ga:

Can you please go to the researcher forum? It's wrong for me to be
credited with the answer, so if you have Paypal account or contact
info, could you please leave it in the researcher forums? I'll
reimburse you for the cost of this question.

Best Regards,
blader-ga

GOING A STEP FURTHER CAN THE BUYER BE ONE OF THE RECEPIENTS OF THE TRUST AND:
     1: A NEW RESIDENCE IS PLACED IN THE TRUST FROM DOWN PAYMENT
     2: CAN THE TRUST TAKE BACK A MORTGAGE  OR DO A CONTRACT SALE
        WITH A BALLOON PAYMENT AT TERINATION OF TRUST
     3:  CAN RECEPIENT ELECTED TO GIVE UP HIS RIGHTS IN THE TRUST 
        AS PART OF THE PURCHASE FOR CONSIDERATIONS OF THE PURCHASE
     4: HOW WOULD THE MORTGAGE INTEREST BE HANDLE

GENTLEMEN, I FEEL YOU ARE VERY CLOSE IN ANSWERUNG TO MY SATISFACTION
THIS QUESTIION AND WOULD LIKE TO INCREASE MY FINANCIAL ANOTHER $50.00
TO A TOTAL OF $125.00 BUT NEED INSTRUCTION ON HOW TO DO THIS. THANK
YOU FOR YOUR PROMPTNESS TO MY LAST REQUEST,

Jimbo, if you want to pay for further advice, I believe you'll need to
post a new question (clarifications under the current question are
free).  If you want a particular person to answer just say so in the
question; as you can see we're quite honorable around here.

regards,
richard-ga