The Qualified Personal Residence Trust (the "QPRT") may be used to transfer your residence (and future appreciation) to your children and obtain a reduction in potential estate tax. The QPRT may be a particularly effective technique now due to the depressed valuations for the residential real property.
A Qualified Personal Residence Trust allows the donors to remain in the home for an extended period of time and still take advantage of gift and estate tax savings. The term "donor" refers to the property owners gifting the residence through the trust. A donor may use a QPRT on up to two (2) homes: the donor's primary residence and one occasional residence.
When a donor contributes the personal residence to the Trust, the donor decides on the amount of time the he or she remains in the home. The term must be set within the Trust instrument, for example, a term of Ten (10) years. At the end of the term, the Trust terminates and the home passes to the beneficiaries. The donor may remain in the home following termination of the Trust as long as he or she agrees to pay the beneficiaries the market rent for a similar property.
QPRTs avoid estate taxes because the donor no longer owns the home after the transfer to the irrevocable trust. Therefore, the real property is not included in the gross estate of the donor and the home passes to the children free of estate tax.
QPRTs reduce the donor's gift tax burden because the gift is valued at the date of transfer to the trust and reduced by an amount calculated to represent the value of the term that the donor remains within the home. This reduction in value can be substantial. Further, the value of the home presumably increases during the term in which the donor continues to reside in the home. This technique is particularly effective now due to the depressed market for real property.
The donor may even sell the residence as long as the buyer is not related to the donor. The proceeds from the sale generally must be held in the Trust for two (2) years after the sale, until the termination of the trust, or until a new personal residence is purchased with the proceeds. Alternatively, the governing instrument may allow for the proceeds of the sale to be converted to a Grantor Retained Annuity Trust (GRAT). If so, the donor retains the right to receive a fixed dollar amount from the trust each year, while the principal passes to the beneficiaries at the end of the Trust term. The amount the donor receives each year is defined by statute and depends on whether a replacement residence was purchased with the proceeds from the sale of the original residence.
A QPRT may not hold assets other than the residence, proceeds from the sale of the residence, insurance proceeds, and cash necessary to pay expenses of the trust. Allowable expenses include mortgage payments and additions or improvements to be made within the next six (6) months. This may be an effective alternative if your estate is large enough to have a potential estate tax liability. Call Attorney John Goralka if you wish to discuss whether a Qualified Personal Residence Trust is appropriate for you.
The information in this article is not, nor is it intended to be, legal advice. This article is for informational purposes only and may or may not apply to you. You should consult an attorney for advice regarding your particular circumstances. We invite you to contact us and welcome your calls, letters and electronic mail. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.