941 / Are there any exceptions to the general rule that a qualified personal residence trust must only hold the taxpayer's principal residence?

A qualified personal residence trust is generally prohibited for the entire term of the trust from holding any property other than one residence to be used as the personal residence of the term holder(s), but certain exceptions are available. Thus, a qualified personal residence trust is permitted to hold cash in a separate account, but not in excess of the amount needed (1) for payment of trust expenses (including mortgage payments) currently due or expected within the next six months, (2) for improvements to the residence to be paid within the next six months, and (3) for purchase of a personal residence either (a) within three months of the creation of the trust, or (b) within the next three months pursuant to a previously entered into contract to purchase. Improvements to the personal residence which meet the personal residence requirements are permitted.¹

Generally, sales proceeds (including income thereon) may be held in a qualified personal residence trust in a separate account until the earlier of (1) two years from the date of sale,
(2) termination of the term holder's interest, or (3) purchase of a new residence. Insurance proceeds (including, for this purpose, certain amounts received upon an involuntary conversion) paid to a qualified personal residence trust for damage or destruction to the personal residence may also be held in the trust in a separate account for a similar period of time.² However, with respect to trusts created after May 16, 1996, a qualified personal residence trust must be prohibited from selling or transferring, directly or indirectly, the residence to the grantor, the grantor's spouse, or an entity controlled by the grantor or the grantor's spouse, during the original trust term and at any time after the original term interest during which the trust is a grantor trust. A distribution upon or after the expiration of the original duration of the trust term to another grantor trust of the grantor or the grantor's spouse pursuant to the trust terms will not be treated as a sale or transfer to the grantor or grantor's spouse if the second trust prohibits sale or transfer of the property to the grantor, the grantor's spouse, or an entity controlled by the grantor or the grantor's spouse. This prohibition against a transfer to the grantor or the grantor's spouse does not apply to a transfer pursuant to the trust document or a power retained by the grantor in the event the grantor dies prior to the expiration of the original duration of the trust term. Nor does this prohibition apply to a distribution (for no consideration) of the residence to the grantor's spouse pursuant to the trust document at the expiration of the original duration of the trust term.³

Cash held by a qualified personal residence trust in excess of the amounts permitted above must be distributed to the term holder at least quarterly. Furthermore, upon termination of the term holder's interest, any cash held by a qualified personal residence trust for payment of trust expenses must be distributed to the term holder within 30 days.⁴

The qualified personal residence trust must provide that any trust income be distributed at least annually to the term holder.⁵ Distributions from a qualified personal residence trust cannot be made to anyone other than the term holder during any term interest.⁶ Commutation (generally, an actuarially based acceleration or substitution of benefits) of a qualified personal residence trust is not permitted.⁷