Given the state of the economy, it's not uncommon for real estate that has been transferred to a qualified personal residence trust (QPRT) to have experienced less than anticipated appreciation or even depreciation. Consequently, one of the purposes of the QPRT--removing future appreciation from an estate--may go unachieved. Some grantors in this position may be inclined to "unwind" (undo) the QPRT. That, however, may not be the best option.
If you unwind the QPRT, you will have wasted any payment of federal gift tax or gift tax exemption that you may have used on the original transaction. For example, say you transferred your primary residence valued at $500,000 to a QPRT with a 20-year term when you were 40 years old and the Section 7520 rate was 4%. You made a gift of approximately $205,000, and you either paid gift tax on that amount or you used up $205,000 of your $1 million gift tax exemption. Either way, you will have squandered that amount because you won't get that back when you unwind the QPRT.
You may be better off keeping the QPRT. Even if there will be zero appreciation in the property, you might still enjoy some tax savings if you let the QPRT continue. That's because when the IRS values the gift, it assumes there will be no appreciation in the property; plus, it gives you a discount because there's a chance you may die during the trust term. So, if you outlive the trust term, you will still enjoy the benefit of that discount.
Not only that, but when the QPRT terminates, you will have to pay the remainder beneficiaries
fair market rent. These payments will reduce your estate even further.
That said, if you still want to unwind the QPRT, your best option may be to invalidate the QPRT by ceasing to use your home as a primary residence (a requirement for a valid QPRT).
How? Sell the home or rent it out.
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