Qualified Personal Residence Trust
A Qualified Personal Residence Trust (QPRT) is a special type of grantor-retained interest trust (GRIT) that can reduce your estate if you have a potential estate tax liability. Use a QPRT to transfer your residence to a trust while continuing to live in it for a preset term of years. You will still be able to deduct your real estate taxes and mortgage interest on your income tax return. At the end of the fixed term, ownership of the residence passes to the trust’s beneficiaries, usually your children. If you as grantor wish to continue living in the house at the end of the term, you can lease the residence from the trust’s beneficiaries at the prevailing market rate, depleting more of your estate in the form of rent.
Since your beneficiaries receive no benefit from the gift during the term of the QPRT, the QPRT transfer is made at a discount from the residence’s existing value for gift-tax purposes. Once the residence is placed in the QPRT, any appreciation in the value of the residence accrues outside your estate.
During the term of the QPRT, you can sell the residence and replace it with a new residence or convert the sale proceeds in the QPRT trust to an annuity. If you sell, capital gains taxes on any appreciation will be due, although you could take advantage of the preferential Internal Revenue Code rules for capital gains on residences. Roll over any gain from the sale into a new residence to avoid the tax or use your $250,000 exclusion ($500,000 if married) as often as every two years. The IRS allows two QPRTs per person, so it is possible to use this device for both your principal residence and one vacation home.
A QPRT will help avoid estate taxes only if you outlive its term of years. If you do not survive the QPRT term, it will be more or less ignored and the value of the residence is included in your estate.
QPRTs are often presented as a “win-tie” situation because if the QPRT property is included in your estate, your only loss may be the professional fees associated with creating and maintaining it. However, if you do not have an estate-tax problem and utilize a QPRT for an appreciated residence, then your heirs in fact do lose because they may be stuck with a capital gain tax when the property is sold. If you hold the property in your estate until you die without transferring it to a QPRT, then your heirs receive a basis step-up and all capital gains disappear.
If you live in the Chicago or Lake County area, and need an experienced Trust attorney, please contact Matlin and Associates.
Types of Trusts We Establish:
- Estate Planning
- Probate & Trust Administration