Qualified Personal Residence Trust
What is a QPRT?
A qualified personal residence trust is an irrevocable trust for your residence.
It serves two purposes.
It helps you remove the home from your estate to reduce or eliminate estate and gift taxes. It also helps to transfer the property to a beneficiary to avoid probate.
Qualified Personal Residence Trust (QPRT)
What is a QPRT?
A qualified personal residence trust is the irrevocable Trust for your residence. It serves two purposes. It helps you remove the home from your estate to reduce or eliminate estate and gift taxes. It also helps to transfer the property to a beneficiary to avoid probate.
Irrevocable means unamendable
Once created, the terms of a QPRT are unchangeable. Even so, you continue to live in residence for a specified length of time in the trust terms. You have retained an interest in the house. Upon the expiry of the period, the remaining interest is passed on to your beneficiary tax-free.
Why Create a QPRT
The central importance of this Trust is reducing the size of your taxable estate. You can put in the Trust your primary residence or your vacation home.
When you do that, you can quickly reduce your estate’s size below the taxable threshold so that you don’t pay any estate taxes when you pass the home to your heirs. Avoiding a 55% federal estate tax makes you wealthy, no doubt.
The other advantage is that you get to stay in the homeplace. Any appreciation in value in the house is not taxable. Real estate appreciates through the years, and just for emphasis, in a QPRT, it appreciates tax-free. So, the QPRT is a chance for your beneficiaries to get a large inheritance when you pass away.
What’s more, as you keep up to live in the QPRT home, you have a legal right to claim income tax deductions during its term. That is because this Trust is a grantor trust. The IRS treats it as a gift for income tax purposes. (Speak to a Trust Attorney today)
Qualified personal residence trust example
Hanna and James Wakoski want to pass their home to their son, but they aren’t ready to move out yet. Holding on to this house increases its tax liabilities. So, they decide to put it in a QPRT.
The house has a value of $500,000 when they set up the Trust. Twenty years from now, the value could be worth $650,000, which is a gain of $150,000. The appreciation happens tax-free. If the trust term expires in twenty years, the Wakoskis get to pass the property to their son tax-free.
Key things to note about the QPRT
When writing the irrevocable Trust, the grantor should set clear terms that define the beneficiary and the length of time they’ll remain in residence -a period known as the retained income period.
- The Trust is funded with your property.
- A new deed is recorded from your name into the name of the Trust.
- A fair market value should be established at the transfer. This is done through an appraisal of the property to inform gift tax.
The grantor should report gift tax to IRS by filling Form 709 the year they transfer the home into the QPRT ( the IRS deems the transfer a gift)
During the Trust, the grantor lives in the property, managing it and benefiting from income tax deductions. When the period ends, the property is transferred to stated beneficiaries by recording a new deed from the title of the Trust to the beneficiaries’ names.
If the owner wishes to continue living in the home after the trust term’s expiry, they are required to pay fair market rent. This transfers more assets to the heir’s gift free.
Common challenges of a QPRT
If many beneficiaries are named, they may disagree on what to do with the home after your death-taxes, and bills have to be paid on the property after you die. It has to be managed. Expenses ought to be shared between beneficiaries.
If the grantor lives in the QPRT home after the trust term expires, they have to pay rent. Otherwise, the house is reverted into their taxable estate. This can cause legal or taxation issues.
The grantor may want to sell the home in the Trust after transferring to the QPRT without reinvesting the proceeds in a new residence. This could terminate the term of the Trust.
The grantor wants to terminate the QPRT, even though it’s an irrevocable trust. Does the Trust allow the grantor to receive a QPRT distribution?
An experienced trust attorney can be of critical assistance to both the grantor, trustee, and beneficiary during the creation and administration of a QPRT-for compliance, asset protection, and trust value maximization.
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