What is a Qualified Personal Residence Trust (QPRT)?
A QPRT is a form of irrevocable living trust designed to reduce the amount of gift and estate taxes generally incurred when transferring an asset to a beneficiary. According to the law, the QPRT is a proper legal technique to protect an individual’s assets for their beneficiaries and protects those assets from creditors and lawsuits. An irrevocable trust cannot be changed in any way while the trust is in effect. This helps ensure that a judge cannot simply order a person to turn over protected assets to creditors or change the circumstances of the trust that would allow others to obtain the asset.
Once the residence has been transferred to the trust through a duly prepared and executed deed, the assignee retains the right to live in that house for a specified number of years. As long as the owner resides in the house, no rent will be paid. The landlord is responsible for all housing expenses, such as repairs, real estate taxes, and maintenance fees, which are covered by Income Procedure 2003-42. [2003-23 IRB 993 section 4 Art. II (B) (2)]. If the owner is alive after that predetermined number of years, the trust automatically transfers ownership of the home to the owners’ beneficiaries without having to pay estate taxes. Beneficiaries can rent the house to the original owner of the house. The most attractive part of this plan is that by paying the rent after the QPRT ends, the owner transfers additional assets to their beneficiaries without having to pay any gift or inheritance taxes. The fact that they have received the rent money from the parents does not prevent them from returning the money to the parents. If the home is sold, the proceeds from the sale can be used to purchase another home or other items for the parents as desired by the beneficiaries.
The main advantage of the QPRT is the tax savings it provides to the owner and beneficiaries of the trust. When residency is transferred to the QPRT, it counts as a gift, but a typical IRS gift tax is not assessed. Instead, the IRS calculates a modified gift tax based on published tables and the total time the home spends on the QPRT, which is applied to the value of the home. Once the trust time period, which is agreed upon when creating the QPRT, ends and the owner is still alive, the residence is transferred to the beneficiaries without any gift or inheritance tax.
If the residence has appreciated since its original appraisal, gift tax is based on that home value, as calculated by the IRS, and not on the increase in home value. If the value of the home does not increase or stay the same, the beneficiaries would not have to pay any gift tax on the home.
Another benefit of the QPRT is that the tax benefits can be improved if the husband and wife jointly own the home. Pursuant to section 25.2702-5 (c) (2) (iv) of the Treasury Regulations, the husband and wife can transfer half of the home ownership in two separate QPRTs. Each separate QPRT allows the husband and wife to live in the residence for a specified number of years based on the terms of each QPRT. In the event that an owner dies before the QPRT ends, the half that was in the trust would be placed in the estate and would be subject to estate and gift taxes. So what if you want to sell the house that is under a QPRT and buy a new house? The QPRT trustee would simply sell the old home and purchase a new one in the QPRT’s name. If the value of the new home is greater than the old, then the trustee will have to pay with separate funds and retain ownership of that part of the home.