What is a Qualified Personal Residence Trust?
A Qualified Personal Residence Trust (QPRT) is a type of irrevocable trust that allows the owner of a personal residence to transfer the title and ownership of their home to their trust for a set number of years, usually 5-20. When the QPRT trust terminates, home ownership is transferred to the beneficiaries.
The grantor retains the right to live in the residence for the duration of the trust term. While living in the home, the grantor is responsible for paying property taxes, mortgage payments, and maintenance expenses on the property.
The home has a significantly reduced value on the real estate market because the grantor has been living in it rent-free for the duration of the trust term. A buyer is unlikely to be willing to pay for a residence now and wait to assume ownership until the QPRT trust terminates.
The value of the residence (the grantor’s gift to the trust) equals the value of the property when the trust is created, minus the interest retained by the grantor. This interest is determined using the federal discount rate. Because the owner retains an interest in the home, the gift value of the property is lower than its fair market value, which means that its gift tax is also reduced.
This allows the grantor to make a discounted gift to their QPRT using the lifetime gift tax exemption while retaining the right to live in the home throughout the trust term.
Any value the property accrues between the day the grantor establishes the trust and funds it with their residence, and the day they transfer it to their beneficiaries will not be counted for tax purposes.
QPRT Trust Advantages
A QRPT provides many advantages, including the following:
- It provides the ability to transfer your residence to your beneficiaries and creates a legacy for your family.
- It reduces your taxable estate by removing the value of your home from the estate since it is owned by the trust.
- Property value is calculated based on the applicable federal rates, which reduces gift taxes.
- The grantor can continue to live in and enjoy the home for the duration of the trust. They will be responsible for maintaining and repairing the property but will also get to take advantage of all appropriate income tax deductions.
What happens when the QPRT Terminates?
Once the QPRT terminates, the beneficiaries legally own the residence. The trustee is responsible for transferring the title and ownership of the home to the beneficiaries. This ensures that the property is correctly titled and insured.
The grantor can pay rent to continue to reside in the home. Some grantors may choose to pay rent in exchange for living on the property. This could be another way for a grantor to continue to transfer their wealth without paying estate or gift taxes. The beneficiaries can expect to pay taxes on this income.
What happens if a grantor dies before a QPRT expires?
Suppose the grantor dies before the QPRT expires. In that case, the fair market value of the property will be included in the estate for tax purposes. The property will be subject to estate taxes. The home’s value will be determined as of the date of the grantor’s death, not the date the QPRT was created.
As an irrevocable trust, a QPRT cannot be changed once it is established. The key is to set the trust length as long as possible to gain the most tax benefits, but if the term outlasts the grantor’s lifetime, the wager is lost. Longer-trust lengths result in smaller remainder interest for the beneficiaries, which reduces the gift tax, but only if the grantor outlives the trust’s term.
What are the steps for establishing a QPRT?
If you want to pass your primary residence to your beneficiaries while reducing your potential estate and gift taxes, a QPRT may be the proper estate planning tool for you. Since this trust has several variations, talk to your estate attorney before signing the trust agreement.
The first step in establishing a QPRT is writing an irrevocable trust agreement. As part of this process, you will need to name a trustee and successor trustee. You will also need to determine the length of the QPRT term based on how long you want to live in the residence. This is the retained income period. Once this period ends, the homeownership will pass to the beneficiaries.
The next step is to fund the trust with your primary residence. To do this, you will need to record a new deed in the name of the trust and file it in the land records where your property is located.
Next, you will need to have your home appraised by a licensed real estate appraiser. This value is used to establish the fair market value for your home for gift tax purposes. You will then file a gift tax return with the IRS, and if your state requires one also, you will need to file a state gift return.
If you are interested in establishing a QPRT as part of your estate plan, schedule a call with us at 855.631.3457 to learn more about how to protect those most important to you.