“When creating an estate plan, one important question to consider is how to handle the transfer of personal property, including your home. A Qualified Personal Residence Trust, or QPRT, is something you may decide to create to minimize gift and estate taxes to be paid by your heirs.”
A Qualified Personal Residence Trust takes your personal residence out of your estate, which can provide some estate tax advantage. The QPRT is a type of irrevocable trust, so once it is created, it is permanent and cannot be reversed. The QPRT is also a type of grantor trust, meaning that the trust creator or grantor may take advantage of gift tax exemptions for property placed in the trust, explains the article “Qualified Personal Residence Trust (QPRT)” from yahoo! finance.com.
As a grantor, you can live in the home for a determined period of time, as you retain interest in the property during the trust term of years. Once the QPRT term ends, ownership of the property gets transferred to the beneficiaries of the trust, whom you will select.
When you establish a QPRT, you take your personal residence, a primary or secondary home, out of your estate and place it in the trust. While the trust is in place, you and your family may live in the home, and you continue to be responsible for maintaining the property’s upkeep and property taxes.
Any appreciation that occurs after the transfer takes place is also removed from your estate. Because you retain an interest in the residence, you can reduce the amount of property’s value that is subject to estate and gift taxes from your estate.
However, there is one rule you need to understand and consider before setting up the QPRT—you must outlive the term of year of the trust. If you don’t, the entire value of the residence may be included in your estate, which destroys the key reason for setting up the trust.
A QPRT can be a complex tool but its advantage is that it can create financial legacy for your beneficiaries, while limiting your estate taxes after your death as your estate will be shared and if you are paying rent to trust beneficiaries, creates another path to minimize estate taxes.
On the other hand, a QPRT is irrevocable. Therefore, if your circumstances change, it may not be useful for you but you won’t be able to undo it. If you die before the end of the term, any benefits for gift or estate taxes are lost. If there is a mortgage on the property, mortgage payments might be counted against gift tax exemptions.
Attempting to refinance a home that’s owned by a QPRT is difficult, and in many circumstances, not even possible. You don’t own the home, the trust does. Therefore, the property cannot be used as collateral. Selling a home that is owned by a QPRT is also far more complicated than selling the property if you owned it outright.
Our firm can help you analyze your estate and tax situation to determine if a QPRT is a useful tool for you and your family.
Reference: yahoo! finance.com (July 29, 2020) “Qualified Personal Residence Trust (QPRT)”
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