Should You Create a Qualified Personal Residence Trust?
By: Barry E. Haimo, Esq.
April 7, 2022
What is a Qualified Personal Residence Trust (QPRT)?
A QPRT is an irrevocable trust that allows a person (the grantor) to remove a primary residence and/or a vacation residence from their estate to decrease the taxable value of that residence(s) for their beneficiaries.
This enables the grantor to effectively freeze the market value of the home, and then decrease that value further by living in it for the initial term of the trust.
How Does a QPRT Work?
The grantor funds a QPRT with a residential property for an “initial term.” They define the “initial term” as the amount of time they wish to continue living on the property. The value of the initial term, referred to as the “retained interest,” is quantified according to a formula that uses IRS-published values.
Provided the grantor survives the length of the initial term, at the end of that term, the QPRT distributes the property to the beneficiary at a decreased value. The formula for calculating the decreased value of the property is complex and depends on several IRS-published values.
Specifically, it is:
Fair Market Value of the Property the Day the QPRT was Created – Retained Interest Adjusted for the Likelihood That the Grantor Survives the Initial Term = Decreased Value of the Property
Or, more simply:
FMV – ARI = DVP
After the initial term, the residence becomes the property of the beneficiaries, but the grantor retains the right to rent the home from the beneficiaries for a fair market value. In effect, this allows the grantor to continue living in the home, while also providing more money to their heirs in the form of rent, which is not subject to gift or estate taxes.
Is a Qualified Personal Residence Trust (QPRT) Right for Me?
Do you own a high-value primary or vacation residence? Plan to live there for the foreseeable future? Expect your estate to carry a high tax burden? If you answered yes to these questions, a QPRT can help you reduce the tax burden for your heirs.
However, it is vital to understand that the grantor must survive the length of the initial term for the QPRT to distribute. QPRTs also complicate the selling of a home.
Advantages of a QPRT
- Limits taxes paid on an estate
- Protects both grantor and beneficiaries from lawsuits and creditors during the initial term
- Allows the grantor to live in the home rent-free during the initial term
- After the initial term, allows the grantor to continue paying their beneficiaries in the form of rent, without increasing the estate or gift tax burden
- Encourages your family to hold on to your home for many generations
Disadvantages of a QPRT
- Depends on the survival of the grantor through the initial term
- Eliminates your right to live rent-free in the residence after the initial term
- Complicates the selling of the home
- If the home is sold during the initial term, the proceeds from the sale must be invested into a new home or received in the form of an annuity.
- If your beneficiary sells your home after the initial term, they will owe capital gains taxes
- Can terminate property tax benefits associated with owning the property as a primary residence
- Gains depend on the applicable IRS interest rate, which fluctuates in response to economic factors
So, if you foresee health issues or the need to sell the home, a QPRT may not be the right estate-planning option for you. A great way to tell if particular estate plan tools will work for you and your loved ones is to utilize our FREE Estate Plan Suitability Checklist.
Want to learn more about how to protect your family, assets, and business, and gain the peace of mind of knowing you’re prepared and in control? Call us to get started today at 954-228-3369. We’ll help you achieve your estate planning goals and ensure you feel confident that you’re leaving the legacy you want for your loved ones.
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