A Qualified Personal Residence Trust (QPRT) is an estate-planning tool that allows individuals to retain the right to live in their home for a specified period of time while also providing for the eventual transfer of a home at a lower transfer tax rate. A grantor using the QPRT transfers title to a personal residence to the trust (either a primary residence or a vacation home) but retains an interest in the home for a specific term of years. The grantor continues to live or otherwise use the residence during the trust term. At the end of the trust term, the remainder interest in the home is transferred to beneficiaries of the trust as a gift. Because the gift is of a remainder interest, the transfer takes place at a discounted value, allowing for potentially large estate tax savings.
Should You Use a QPRT?
A QPRT is an excellent tool to move the value of your residence and future appreciation out of your estate at a discounted value. QPRTs are most useful for those with taxable estates (currently set at $5.43 million dollars for an individual or $10.86 million for a couple) where the residence value accounts for a large chunk of the total estate value. QPRTS are also useful for those who want to make sure a beloved family home stays in the family. You should discuss the potential pros and cons with an attorney before setting up a QPRT.
How Many QPRTS Can I Have?
Each taxpayer may have up to two QPRTs. Each QPRT may hold an interest in only one home. Therefore, if you wish to transfer your principal residence and a vacation home to a QPRT, you must use two separate trusts.
How Long Should the Trust Term Be?
An attorney can help determine an appropriate trust term. Because the QPRT grantor must survive the trust term, you should not have a trust term longer than your life expectancy.
Who Is the Trustee of the QPRT?
You can name yourself, you and your spouse, or a trusted friend or family member as trustee. Your trust should provide for a backup or successor trustee to serve if you or your named trustee is unable to act.
Some QPRT Considerations:
- You must outlive the trust term in order for the QPRT to be effective. If you do not outlive the trust term, the residence will be included in your estate for federal estate tax purposes.
- During the trust term, you can live in the residence and use it as you choose. At the end of the trust term, however, the QPRT beneficiaries become legal owners of the property. At the end of the trust term, you become a tenant and must pay rent and sign a lease agreement. You may not like the idea of being a tenant in your own house, but paying rent is actually a good way of getting additional cash out of a potentially taxable estate.
- You are entitled to claim the real estate taxes and other deductible expenses as deductions on your income tax return.
- You or your spouse cannot repurchase the home from the trust during the term of the trust or after. If you wish to sell the house during the term, you can sell the home and use the sale proceeds to purchase a new home that will be owned by the trust and will be subject to the same trust provisions.
A QPRT can be an effective tool to transfer your home to loved ones. However, a QPRT is a technical document requiring strict adherence to IRS requirements. The Law Office of Kirsten Howe can help determine if a QPRT is a smart choice to achieve your estate planning goals.