Qualified Personal Residence Trust

Properly drafted, the Qualified Personal Residence Trust (“QPRT”) is designed to transfer a personal residence or vacation home to your beneficiaries in the future using today’s valuation.

The trust works like this: the residence is valued and transferred to the trust after the trust is drafted and signed. The donor retains the right to use the home for a predetermined term of years (i.e., 10), at which time the residence passes to the ultimate beneficiaries, such as his children. This trust is allowed to sell the home as long as the proceeds are reinvested in another place.

If the donor does not live until the end of the trust term, it is included in his estate. If the donor survives the term, he will need to pay rent to the trust if he desires to retain the property’s exclusive use.

Most planners will use two QPRTs for a husband and wife. Each trust has its term of years, and if only one dies before the trust matures, only one-half of the value would be part of a taxable estate. Unlike other estate planning techniques, the QPRT is authorized under the Internal Revenue Code and its regulations.

This is an excellent tool to transfer personal residences to your beneficiaries.

Other Considerations

The grantor must outlive the term of the trust. If he does not, the entire value of the personal residence held in the QPRT will revert back to the grantor’s estate. When setting up the QPRT, it is important to consider the grantor’s current and potential future health. This will help determine expected life expectancy and the appropriate term of the trust.
Since the grantor only has a right to the residence for the trust-stated term, the home is not as marketable as when the grantor owns the residence outright. This also increases the inconvenience to the creditor because they cannot force the grantor to sell the residence, since the rights have been contributed into an irrevocable trust. This point was confirmed in a recent court case In re: Yerushalmi by the Eastern District of New York.
Once the term of the QPRT expires, the grantor may still occupy the residence, but he must give up ownership of the property to the specified beneficiaries. The grantor is then required to pay a fair market value rent to reside in the home. In addition, paying rent will also pass wealth to the next generation without any gift tax implications.
The beneficiaries will receive carryover basis in the residence. There is no step-up in basis; instead, their basis will be equal to the grantor’s basis in the property. Note that if the beneficiaries do not intend to hold onto the residence for an extended period of time, this estate planning method has the potential to create a high-income tax liability when the residence is sold.

Conculsion

Taxpayers can save estate tax on their homes by transferring the home to a trust for a set number of years during the taxpayer’s lifetime. If held until death, the house’s gift tax value is a fraction of the amount for estate tax purposes.

When set up correctly, a QPRT can provide a valuable means of asset protection to your estate. Talk directly with your advisors to weigh the pros and cons relative to your situation.