Qualified Personal Residence Trusts FAQ
A Qualified Personal Residence Trust (QPRT) is an irrevocable trust. The homeowner is the grantor who creates the trust as a way to remove or reduce the taxable value of a primary residence or secondary residence from their estate.
Q: What Is a Qualified Personal Residence Trust?
Under a QPRT, the homeowner retains an interest in the property for a period of time and can live there until the end of the trust term. The number of years is written into the QPRT terms. Once the term of years is done, the trust is transferred to the homeowner's beneficiaries, usually their children. It may also be transferred into a trust for the benefit of the beneficiaries.
Once a property is transferred into a QPRT, future appreciation of the value of the house is reduced. The taxable gift is the value of the residence transferred to the QPRT, less the value of the retained income interest. This value is calculated using:
- The age of the donor;
- The term of the trust in years (this determines the value of the retained interest in the home);
- The 90CM mortality table used to compute the charitable deduction for all planned gifts;
- Actuarial table B used by the IRS to value annuities; and
- The IRS Code section 7520 interest rate.
An estate planning attorney will walk you through the exact calculation for 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 gift tax exemption threshold.
Q: Who Can Be the Trustee?
The grantor is often the trustee of a grantor trust, but it could also be a spouse or trusted friend. As with all trusts, the trust document should provide for a successor trustee if you become incapacitated.
Q: What Happens if I Die While I'm Living in the Home?
If you die before the term of the trust is complete, the home reverts back to your estate. There is no reduction in value. For federal estate tax purposes, the home is valued at fair market value without any reduction.
Q: How Long Should I Retain the Right to Occupy a Home That Is 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 of the trust, the home will come back into your estate for tax purposes. On the other hand, the longer you retain the right to occupy the home, the greater the gift tax benefit and estate tax savings.
Q: Can I Put Both My Principal Residence and My Vacation Home in a QPRT?
Yes, but be aware that a grantor can have a QPRT for no more than two residences — a principal residence, a vacation home or second home, or a fractional ownership interest of either residence. 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.
Q: Can My Spouse and I Transfer a Home We Own as Joint Tenants to a QPRT?
Yes, you can.
Q: Can I Transfer My Home and the Entire Large Parcel of Land It Sites On Into a QPRT?
The IRS will consider your residence to include land adjacent to the home to the extent such land is reasonably appropriate for the residence. The location, use, and size of the home will be considered in determining how much of the surrounding land may be transferred with the home.
Q: What if I Want to Sell the Home Transferred Into the QPRT?
You can sell your principal residence after it has been transferred into a QPRT and you retain the capital gains exclusion for a primary residence (but not a secondary residence). You must reinvest the proceeds in a new residence that will be owned by the trust and will be subject to the same trust provisions. If you do not, the QPRT will convert to a Grantor Retained Annuity Trust (GRAT)
Q: What if the Home Is No Longer My Personal Residence?
Perhaps the homeowner moves into a nursing home and the family home is no longer a personal residence. In this case, the QPRT ends and 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 beneficiaries at the end of the term.
Q: Who Pays Expenses of Maintenance, Insurance, and Real Estate Taxes?
You, the taxpayer, may pay them directly or transfer funds to the trustee to pay them. However, you may only transfer an amount equal to six months of expenses to the Trustee.
Q: Can I Claim the Property Taxes and Other Deductible Expenses on My Income Tax Return?
Yes, because the trust is a grantor trust, you are entitled to deduct the same expenses as you did before, when you owned the home.
Q: 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 who hold the remainder interest in the trust — that is, your beneficiaries. Under the law, the lease must be for fair market rent, as if you were renting from a third party. The IRS will closely scrutinize this arrangement and rental income is taxable income to your beneficiaries.
Q: Can I Repurchase My Home From the Trust?
No, the trust must specifically prohibit the sale or transfer of the home to you or to your spouse during or after the term of the trust.
Get Professional Legal Help With a QPRT
A QPRT is a technical document and should be carefully drafted by a qualified attorney to ensure that all of the requirements under the Internal Revenue Code are met. Contact a qualified local estate planning attorney who can explain the tax consequences for this and other types of trusts.
Can I Solve This on My Own or Do I Need an Attorney?
- DIY is possible in some simple cases
- An attorney is on your side during complicated legal decisions
- Cases with trusts and beneficiaries are rarely cut and dry
- Get tailored advice and ask your legal questions
- Many attorneys offer free consultations