A Qualified Personal Residence Trust (QPRT) is a specific type of irrevocable trust that allows you to remove your primary residence or another personal home from your taxable estate. While creating can be a QPRT complicated process, doing so lets you avoid estate taxes and reduce the amount of gift taxes you have to pay.
And guess what? When the feds take less, your heirs get to keep more of the wealth you’ve worked your whole life to accumulate.
Keep reading to learn more about QPRTs, and when you're done, check out our article Three Ways To Properly Legally Protect A Personal Residence to discover more asset protection tips for your personal home.
For estates of several million dollars or more, a QPRT can allow you to keep the value of the home out of part of your estate that is subject to estate taxes. Although the QPRT is not used as often as other estate planning tools, it can save you a significant amount in taxes.
In order to create a QPRT, you have to transfer the title to your home to a trust. However, as part of the terms of the trust, you’ll include a provision that allows you to continue to live in the home for a specific period of time before passing to your heirs. The time in which you can continue to live in the home is known as a qualified term interest or a retained income period. So, while you won’t own your home anymore, you can still live there until this period expires.
While there is technically no limit on how long you can keep your interest in the home, if you pass away before the end of your qualified term interest, the value of the home will be included in your taxable estate. So, you should always make sure the term chosen makes sense given your age and future life expectancy.
If you survive until the interest expires, the title to the home will pass to your heirs and will not be included as part of your estate upon your death. After your heirs inherit the property, you can pay rent, relocate, or figure out other living arrangements. Any rent payments you make to continue living in the home will further reduce the value of your taxable estate.
Although a QPRT can help you avoid estate taxes, Uncle Sam isn’t going to let you get off scot-free: the transfer of your home is subject to gift taxes. However, since you’re retaining a qualified term interest, the property’s gift value will be lower than its fair market value, which means you’ll owe less in gift taxes.
This deduction can translate to significant savings, particularly when younger homeowners set up QPRTs with extensive qualified term interests. The longer the retained income period, the lower the gift value of the home, the lower your tax bill from the IRS. Just remember that you have to outlive the qualified term interest for your heirs to reap the rewards of your estate planning. An experienced estate planning professional can help you decide on the most strategic term for your situation.
Another way a QPRT saves you money is by avoiding gift taxes on appreciation. When you transfer your home to the trust, you pay the gift tax on its current value, even though the title won’t pass to your heirs for years to come. That means that any increase in your home’s value during your qualified term interest won’t be subject to the gift tax, which can also save you a substantial chunk of change.
While the QPRT can be a great estate planning tool for shielding your home from estate taxes, it’s not the right solution for everyone. It’s important to keep in mind that specific requirements must be met to qualify for the tax savings. There is also a complicated set of special QPRT/grantor trust valuation rules for estate and gift tax purposes, which are outlined in Internal Revenue Code §2702 and related regulations.
As with most estate planning strategies, you should consult with an attorney who specializes in this type of law to determine if a QPRT is right for your situation. An estate planning lawyer who knows their stuff can help you decide on the best methods for saving your money from the IRS, determine if you can qualify for a QPRT and make sure it’s set up correctly if you choose to take that path.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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