What is a QPRT?
A QPRT is a Qualified Personal Residence Trust. This is a specific type of trust in which its creator can remove a residence from his or her estate. Once the set term is over, the remaining interest in the property is transferred out of your estate to the set beneficiaries, as a remainder interest.
Why Initiate a QPRT?
A QPRT is a lifetime transfer of a personal residence to your children in exchange for continued rent-free use of the residence for the trust term. A QPRT is done for lowering the amount of estate tax that will be paid when a person passes away. The owner lives in the residence for a specific period with only a retained interest in the property. If you are planning on leaving your home to your children, this is a smart way to reduce the value of your estate. This will in turn reduce the amount of Federal estate tax your estate will pay and states such as, Pennsylvania with a high inheritance tax. This is also a smart way to ensure a direct transfer of your estate to your beneficiaries by outlining the specifics in the newly created trust.
How is a QPRT set up and how does the trust work?
The residence owner would create the QPRT for a certain number of years and would name the beneficiaries. The beneficiaries are usually family members. The owner (grantor) would then contribute the residence to the trust, removing his or her name from the property after a length of time, creating a taxable gift. The residence is usually a second home, or vacation home. The fair market value of the residence would be discounted for estate and inheritance tax purposes, at the time of the transfer. The trust will be set up as an irrevocable trust.
Once an Irrevocable Trust has been created, the written terms of the trust agreement generally cannot be changed. The trust is drawn up by an estate attorney and will state the grantor, property, term for the trust and the beneficiaries. A term could be 7, 10 or 15 years. The QPRT works effectively, if the grantor out lives the trust term set for the QPRT. If the grantor should pass away before the end of the term, a date of death value will be included in the grantor’s estate. The grantor’s estate will receive a tax credit for the initial gift of residence to the QPRT. At the end of the term, the grantor may wish to lease or “rent” the residence from his/her beneficiaries. A positive relationship is essential. Leasing the property after the QPRT term has expired is an excellent way to further reduce the grantor’s estate by providing current cash to the heirs as rent each month. It should be noted that this income is taxable income to the heirs. Any gain on the sale of the residence may qualify for the $250,000/$500,000 gain exclusion from the sale of a principal residence, provided the other requirements for the exclusion have been met.
An example: Susan, created a QPRT with a 10-year time frame. Susan, is healthy and aged 53, has a beach house worth $1.2 million market value. She transfers her residence into the QPRT. She retains the right to utilize the home as her residence for 10 years. The value of the initial taxable gift into the QPRT would be about $750,000 and, if Susan survives the 10-year trust term, the residence will pass to her two children with no additional gift or estate tax. Assuming the beach house appreciates at 3% per year, at the end or the 10-year time frame, the house would be worth $1.6 Million. Susan would have been successful in transferring a $1.2 M residence and saved her children $255,000 in estate tax! (based on a 45% estate tax rate and 15% capital gains rate)
“Take Away’s” for a QPRT
- You can gift property with a value of up to $5.34 million (set by IRS in 2014)
- Your heirs receive the double gift of the valuable property, as the asset grows within the Trust and they may also receive cash on an annual basis in the form of “rent” – a positive – both actions remove assets from your estate!
- Most importantly, your heirs will not pay hefty federal estate or state inheritance taxes on an increased value of the residence.
Written by: ||cassandra hartman, office manager & elizabeth genter, president ||