You have worked hard your entire life to provide for your loved ones and be able to leave them secure and safe. Part of feeling secure is having a home to live in.
If you want to give your home to a beneficiary and take advantage of recent tax changes, but still live in your home for a while, a QPRT may be right for you. Let’s delve a little more in depth into what exactly a QPRT is and what to do to be sure it is the type of trust you are looking for.
What is a Qualified Personal Trust?
A qualified personal residence trust (QPRT) is a type of trust that allows the creator of the trust (donor/grantor/settlor) to take a personal home from their estate and give it to a member of their family, loved one, or beneficiary. Establishing a QPRT reduces the amount of gift tax that is incurred when the assets are transferred to the receiving beneficiary. This type of trust allows the grantor to remain living in the residence for a specified period of time, all while retaining interest. Once that period is over, the interest accrued is transferred to the beneficiaries as “remainder interest.” If the grantor dies while living in the residence during the trust period, the estate gets transferred directly to the beneficiaries. If the grantor is still alive when the period ends, they can continue living in the home if they pay a rent to the beneficiary, as the residence will now be theirs legally and not the grantor.
Depending on the length of the trust period, the value of the property during the retained interest period is calculated using applicable federal rates that the IRS provides. Because the owner of the home retains a fraction of the value, the gift value of the property is lower than its fair market value, which lowers the incurred gift tax.
How Qualified Personal Residence Trusts Work
A QPRT can be useful when the trust ends before the death of the grantor. If the grantor dies before the term expires, the property is included in the estate and is subject to tax. The risk of the trust lies in determining the length of the trust agreement added to likelihood that the grantor will pass away before the expiration of the trust. Longer-term trusts can benefit from smaller remainder interest given to the beneficiaries, which in turn will reduce gift tax. This is advantageous for younger trust holders who have a lower possibility of passing away prior to the trust end date.
Why Choose a QPRT
Reduces Taxable Estate
One of the biggest benefits of getting a QPRT is that the trust removes the value of your primary or secondary home and its appreciation from your taxable estate.
Continued Property Use
With your home in a QPRT, you can still live in the property rent-free and enjoy any of the income tax deductions that are associated with the trust.
Gift Tax Benefits
You may be able to avoid gift tax liability because you are giving your residence away. This happens because the trust either falls under the exemption amount or locks in the current value of your home even if the exemption amount is going to eventually be reduced.
Things to Consider
Like all trusts, a QPRT is a legal document that is binding so it is important to know exactly what you are doing and giving away when you decide to get one.
A QPRT is Irrevocable
When you put your residence into a QPRT, you are assuming a huge commitment as you cannot change the terms or cancel the trust. Once established, the trust will only terminate upon the death of the grantor.
If the property in the trust has a mortgage attached to it, part of the mortgage payments are considered gifts that will count against the gift tax exemption.
Any QPRT income and expenses are taxed to the grantor.
Get Quality Legal Help with Your Trusts
You want to make sure that your family is protected and taken care of now and after you pass. Having professional legal help you can count on when drafting your trusts is the best way to make sure they get everything they deserve.
At Brackin Law Firm, we have experienced attorneys that have been preparing estate planning documents of all kinds for decades. Whether your estate planning is simple or very complex, we will provide you with the estate planning solutions that you need to protect your family legacy.
Contact us today and let us assist you with all of your estate planning needs.