Using Qualified Personal Residence Trusts to Reduce Estate Taxes

A Qualified Personal Residence Trust (QPRT) can be a useful estate planning tool for strategically reducing gift and estate tax burdens on your beneficiaries when the asset is transferred.

How QPRTs Work:

A QPRT is an irrevocable trust. Once you transfer a property into the trust, you will not be able to take back ownership. The benefit of the QPRT is that you can continue to live in the house for a specified period of time with “retained interest” in the property. After that period ends, the “remainder interest” is transferred to the named beneficiaries.

QPRTs only work when the trust expires before the grantor’s death, making them a “bet to live” strategy. If a grantor dies before the term ends, the property reverts back to the estate and is subject to the normal tax.

Tax Advantages:

Because the value of the residence is frozen at the time of its transfer into the trust, any future appreciation in value will not be included in the estate. The IRS calculates the value of the retained interest period based on the applicable federal rates set on a monthly basis, which reduces the taxable gift amount that is transferred to the beneficiaries. Since the owner maintains a fractional slice of the property’s value, the gift value ends up being lower than the fair market value.

Things To Consider:

While the QPRT is an attractive option for estate planning, there are a couple of important considerations that you should weigh before jumping in:

Retained Interest Period: While a longer retained interest period equals a much better tax benefit later, it’s a better option for younger grantors with a lesser chance of passing away before the trust ends.

Loss of ownership: Once the specified trust period ends, you no longer legally own the property. One workaround is to rent the property back from your beneficiary(ies), which lets you continue to transfer assets without affecting the annual gift exclusion.

Potential for higher property taxes: Some local and state property tax exemptions may be affected by transferring a property into a QPRT. Be sure to check with the tax assessor to understand the affect of a QPRT.

Heirs may pay higher capital gains if they sell: If a beneficiary decides to sell the property, capital gains will be calculated based on the home’s value at the time the trust was created, not after. Thus, a home that entered into a QPRT at a $1 million value but could sell for $3 million will have a $2 million taxable gain.

Seek expert advice before creating a QPRT

While QPRTs can be an excellent tax-saving tool in your estate planning arsenal, it’s best to seek the advice of an estate planning attorney to make sure it’s a good strategy for you. The estate planning attorneys at Hackstaff, Snow, Atkinson & Griess have deep experience in a wide range of estate planning strategies. Contact us today for a free consultation.