QPRT (Qualified Personal Residence Trust) is a type of irrevocable trust intended to keep the value of your main or secondary residence out of your taxable estate. Creating a QPRT and thereby transferring ownership of your residence into that trust is a complicated process that cannot be reversed. QPRTs have both advantages and disadvantages.
What is a Qualified Personal Residence Trust and How Does It Work?
For estate planning reasons, the owner of a residence may transfer their ownership of the property into a Qualified Personal Residence Trust. In return, they would get a qualifying term interest rate, sometimes known as a “retained income period,” They are able to stay at home because of their interest. If they continue to use the residence, they will start paying fair market rent to your heirs at the conclusion of this term.
If the owner dies during the retained income period, the residence is not included in their taxable estate, but it goes to the trust’s beneficiaries at the end of the term if the owner is still alive.
Advantages of Qualified Personal Residence Trust
A Qualified Personal Residence Trust leaves a lasting impression on your family. If you wish for your home to stay in the family for generations, it will allow you to pass it forward to your heirs in a way that encourages them to keep it for the long haul.
The residence may be used indefinitely with a Qualified Personal Residence Trust. During the retained income period of the trust, the homeowner may continue to live there rent-free and claim any relevant income tax deductions.
These trusts also come with a number of additional substantial financial benefits.
An Antidote to Appreciation
A Qualified Personal Residence Trust deducts the value of your main or secondary residence, as well as any future appreciation, from your taxable estate for a fraction of the cost.
If the home is worth $500,000 and interest rates, the homeowner’s age, and the retained income term selected for the Qualified Personal Residence Trust are all taken into account, a homeowner might utilize as low as $100,000 of the lifetime gift tax exemption in order to remove a $500,000 asset from their taxable estate. This is especially useful if the house’s value has increased greatly by the time the proprietor passes away.
Exemptions may be reduced in the future
A Qualified Personal Residence Trust also protects against reductions in the unified credit, which is frequently referred to as the joint lifetime gift tax and estate tax exemption.
If the value of your home is considerable, the lifetime exemption of $11.7 million in 2021 will allow you to form a Qualified Personal Residence Trust without having to pay any gift taxes. This is significant because transferring your home to the trust is the same as donating it to the trust, which means gift taxes may be required.
If this joint exemption is decreased greatly in the future, you will be able to lock in the value of your residence for estate and gift tax purposes. You will not have to worry about how much your home will rise in value or how much your estate tax exemption will be after you pass away.
Reduce Your Taxable Estate Even More
When the retained income period expires, and you must start paying fair market rent to the heirs to continue using the residence, paying rent at the end will assist in lowering your taxable estate even more. While this requirement may seem to be a disadvantage at first, it permits you to contribute more to your heirs without having to use your yearly exclusion gifts or your lifetime gift tax exemption.
Qualified Personal Residence Trusts and the Risks They Involve
In case you pass away before the expiry of the retained income period, the Qualified Personal Residence Trust transaction will be totally reversed. The entire fair market value of your home will be included in your taxable estate as of the date of your death. Other possible disadvantages should also be considered.
You will be required to pay rent
When the retained income period expires, ownership of the residence goes to your heirs, and you lose your right to the rent-free residence. If you want to keep the residence for a lengthy period of time, you must instead pay fair market rent to your heirs.
It is possible that you may lose your property tax benefits
When the retained income period expires, you may lose property tax advantages. For real estate tax purposes, the home will be evaluated at its current fair market value, and any property tax advantages connected with owning and occupying the property as your principal residence would be lost.
It Might Be Difficult to Sell Your home
If your circumstances change and you wish to sell your residence after it has been taken over by the Qualified Personal Residence Trust, you may face substantial challenges. You must either invest the sale money in a new home or receive payments from the sale proceeds in an annuity if you do not wish to buy a new home.
Your Tax Basis Will Be Passed Down to Your Heirs
The residence will be passed down to your heirs with your income tax basis at the time the gift is made to the Qualified Personal Residence Trust. If a successor sells the house after the retained income period expires, he or she will face capital gains taxes on the monetary difference between the home’s value at the time of the gift and the selling price. This is why a Qualified Personal Residence Trust is suitable for a residence that will be passed down through the generations.