Qualified Personal Residence Trusts FAQ

A Qualified Personal Residence Trust (QPRT) is an irrevocable trust. The homeowner is the grantor who creates the QPRT. The trust removes the taxable value of a primary or secondary residence from the grantor's estate or reduces the value of the asset for the estate.

Following are answers to frequently asked questions about QPRTs.

• What is a qualified personal residence trust?
• Who can be the trustee?
• What happens if I die while living in the home?
• How long should I retain the right to occupy a home transferred into a QPRT?
• Can I put my principal residence and vacation home in a QPRT?
• Can my spouse and I transfer a home we own as joint tenants to a QPRT?
• Can I transfer my home and the entire large parcel of land it sits on into a QPRT?
• What if I want to sell the home transferred into QPRT?
• What if the home is no longer my residence?
• Who pays expenses for maintenance, insurance, and real estate taxes?
• Can I claim the property taxes and other deductible expenses on my income tax return?
• What can I do if I still want to live in my home after the end of the trust term?
• Can I repurchase my home from the trust?

What is a qualified personal residence trust?

As the name implies, a QPRT is a type of trust. A QPRT allows the homeowner to retain an interest in the property for a period of time and live there until the end of the trust term.

The QPRT terms provide for the number of years. Once the term of years concludes, the homeowner's beneficiaries, usually the children, receive the trust's assets. It also may be transferred into a trust for the benefit of the beneficiaries.

Once a grantor transfers property into a QPRT, future appreciation of the house's value is reduced. The taxable gift is the value of the residence transferred to the QPRT, less the value of the retained income interest. The value of the property is calculated using:

• The age of the donor
• The term of the trust in years to determine the value of the retained interest in the home
• The 90CM mortality table to compute the charitable tax deduction for all planned gifts
• The actuarial table B used by the IRS to value annuities
• The Internal Revenue Code section 7520 interest rate

An estate planning attorney will walk you through the exact calculation. Your attorney will examine your situation to demonstrate the value of the taxable gift allowed on a gift tax return. A QPRT can be a significant step in keeping the total value of a taxable estate below the exemption amount. For the QPRT to be an effective estate planning tool, you must ensure the property's value does not exceed the gift tax exemption threshold.

Who can be the trustee?

The grantor is often the trustee of a grantor trust. But this is not a requirement. The trustee could be a spouse or trusted friend. As with all trusts, the trust document should provide for a successor trustee if you become incapacitated.

What happens if I die while living in the home?

If you die before the term is complete, the home reverts to your estate. There is no reduction in value. For federal estate tax purposes, the home value is the fair market value without any reduction.

How long should I retain the right to occupy a home transferred into a QPRT?

Plan to retain the right to live in your home for no longer than your life expectancy. Review actuarial tables and consider your health. If you die before the term, the house will return to your estate for tax purposes. Your estate cannot receive any estate tax exemption if the home reverts to your estate.

On the other hand, the longer you retain the right to occupy the home, the greater the gift tax benefit and estate tax savings.

Can I put my principal residence and vacation home in a QPRT?

Yes. You can put both a principal residence, a vacation home or second home, or a fractional ownership interest of either residence. A grantor can have a QPRT for up to two residences.

A QPRT may hold an interest in only one home, but a home can be subject to more than one QPRT at a time if the QPRT holds a fraction of the residence.

Can my spouse and I transfer a home we own as joint tenants to a QPRT?

Yes.

Can I transfer my home and the entire large parcel of land it sits on into a QPRT?

The IRS considers land adjacent to the home as a part of your residence to the extent such land is reasonably appropriate for the residence. In determining how much of the surrounding land may transfer with the home, the IRS considers the following:

• The location
• The use
• The size of the home

The IRS will consider these characteristics to determine whether the parcel of land the home sits on or adjacent can be transferred into a QPRT.

What if I want to sell the home transferred into QPRT?

You can sell your principal residence after it transfers into a QPRT. You retain the capital gains exclusion for a primary residence (but not a secondary residence). You must reinvest the proceeds in a new residence owned by the trust and subject to the same trust provisions. If you don't, the QPRT will convert to a Grantor Retained Annuity Trust (GRAT).

What if the home is no longer my residence?

Perhaps the homeowner moves into a nursing home. Or, suppose the family home is no longer a personal residence. In this case, the QPRT ends. The trustee must distribute the assets or convert the trust to a Grantor Retained Annuity Trust (GRAT). A GRAT pays an annuity for a fixed amount of time before the balance passes to the named beneficiaries at the end of the term.

Who pays expenses for maintenance, insurance, and real estate taxes?

You, the taxpayer, may pay them directly. Alternatively, you may transfer funds to the trustee to pay them. However, you may only transfer an amount equal to six months of expenses to the trustee.

Can I claim the property taxes and other deductible expenses on my income tax return?

Yes. The trust is a grantor trust. Therefore, you can deduct the same expenses as when you owned the home.

What can I do if I still want to live in my home after the end of the trust term?

You can enter into a lease agreement with the party or parties holding the remaining interest in the trust. You can enter into a lease with your beneficiaries. Under the law, the lease must require fair market rent. The IRS will closely scrutinize this arrangement. Rental income is taxable to your beneficiaries.

Can I repurchase my home from the trust?

No. You cannot repurchase your home from the trust. The trust must expressly prohibit the sale or transfer of the house to you or your spouse during or after the term of the trust.

How can I get professional legal help with a QPRT

A QPRT is a technical document that an experienced attorney should draft. This step will ensure that the QPRT meets all requirements under the Internal Revenue Code. Contact a qualified local estate planning attorney who can explain the tax consequences for this and other types of trusts.