In a recently affirmed decision TVA obtained for the Chapter 7 bankruptcy trustee, the U.S. Bankruptcy Court held that a QPRT — generally irrevocable and commonly used in estate planning to hold personal residences — may nonetheless be revoked when the debtor retains an right to reacquire ownership of the residence.
The case, In re: Robert Ferrante, involves a former savings-and-loan banker, Robert Ferrante, who owned a beautiful 5,500 square foot home on an exclusive island in the harbor of Newport Beach, California, with a 50-foot frontage overlooking the bay. In 1994, Robert transferred property into a QPRT — a qualified personal resident trust — with a 20-year term, to expire in 2014.
TVA successfully argued that, because Ferrante could terminate the QPRT by ceasing to use it as his own personal residence, the QPRT was thus de facto revocable (no matter what it said about being irrevocable), and thus it did not qualify as a QPRT for federal estate and gift tax purposes. The QRPT therefore failed, and the beautiful Newport Beach home reverted to Ferrante, and therefore to his bankruptcy estate.
In other words, Ferrante had the ability to effectively “toggle” into the off-position the QPRT at any time, simply by choosing to no longer live in the home, and this destroyed the QPRT’s protections as to his creditors and made the home available for liquidation.
The upshot: ALL QPRTs are revocable for Chapter 7 bankruptcy purposes because whatever a debtor can do, his/her Chapter 7 trustee can do. Since a debtor can move out, thereby voiding the QPRT, a trustee can impliedly move out and thereby revoke the QPRT. The BAP did not reach this issue, although it was a hotly discussed topic at oral argument, because it did not need to reach it to affirm Judge Albert’s ruling.
In addition, certain QPRTs will be revocable if the settlor retains an illegal right to redeem the property at any time before the end of the 20 year term. This will violate the 1997 regulations that specifically require an express statement that the settlor cannot redeem the property. Ferrante argued that his 1994 trust was grandfathered in, but the statute addressed that and gave such trusts 90 days to commence amendment of the trust agreement. Since Ferrante never did so, Judge Albert ruled that he waited too long.
TVA’s victory was written up by Forbes.