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What is a Qualified Personal Residence Trust (“QPRT”)?

Estate Planners | Monday, May 2nd, 2011

Many people, when planning their estates, elect to establish a qualified personal residence trust (acronym QPRT) as a way of removing the value of their residence or home from their taxable estate. This trust is very appealing due to the fact that it will combine substantial gift and estate tax savings with very minimal lifestyle changes while also helping to avoid the fear that too much has been given away. Under government guidelines, each person is allowed to create a qualified personal residence trust for their primary residence or a trust for their occasional residence (vacation home or other property).

As a real world example, let us assume that you own a home in Connecticut that has been appraised for $2 million dollars and a vacation home in Maine that is worth $1 million dollars, and that you have stocks worth $3 million dollars. You would like to maximize your estate by passing it to your children, but you don’t want to give away too much of the estate right now. The qualified personal residence trust allows you to save gift and estate taxes without parting with money or giving up either of your homes.

How a QPRT Works

Government guidelines allow for the creation of a qualified personal residence trust to transfer title ownership to your home or your vacation home to the trust while retaining the right to live in the home for a specified period of time, such as ten years. During this period, you will not pay rent but you will be responsible for the expenses of the home, including maintenance fees, repairs, upkeep, and real estate or property tax due. This means that you will not experience any modification to your daily living patterns during the period that is specified in the trust. When the term ends, assuming that you are still living, your home will pass to your heirs free from estate tax. You may remain in your home but you will have to agree to pay rent to the beneficiary who receives the home at the current rate for such a rental property.

Qualified Personal Residence Trust and Gift Tax

There are substantial tax advantages to the qualified personal residence trust. Let’s assume that you create a qualified personal residence trust for your $1 million vacation house. Transferring the home to the trust is a taxable gift, but the amount of the gift will not be figured at $1 million, due to the fact that you retain the right to reside in the home for the next decade. Thus the amount of the gift will be the actuarial value of the home that will be passed to the beneficiary at the end of the ten year period (or whatever period you choose). This value is reached by referring to tables that are published by the IRS that take various things into consideration, like your age, the monthly interest rate and the term that you will remain in the home. Let’s say that you are fifty years old, planning to retain residency in the home for ten years, and that the rate of interest is figured at 5.6%. Under IRS guidelines, the gift to the qualified personal residence trust would be just over $500K. With the assumption that you have made no other gifts, there would be no gift tax on the transfer of the property to the trust as it would fall under the $1 million lifetime unified credit, which is the amount of money that each person may give away without triggering the gift tax.

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