When planning your estate, you have several choices in trusts to reduce the taxes on your estate after you die. A Qualified Personal Residence Trust (QPRT) is one such vehicle. The QPRT is an irrevocable trust with an expiration date. It allows you to transfer your home to your heirs without paying the full gift tax amount.
Basics of a QPRT
If you set up a QPRT, you can still live in the house with “retained interest.” When the trust expires, the interest is transferred to the trust beneficiaries as “remainder interest.” The property value is calculated using applicable federal rates from the Internal Revenue Service.
The trust allows the owner to retain a fraction of the value, which means the value of the gift is lower than the fair market value of the home. However, the trust must expire prior to the grantor’s death. If it does not, the property is transferred to the estate and subject to taxes.
QPRT Example
A parent owns a home that has a value of $300,000 at the time he or she creates the trust. The parent does not plan on selling the house and puts it into a Qualified Personal Residence Trust. Since the parent expects to live for at least 15 to 20 years, he sets the trust expiration for 10 years.
In that 10-year period, the house increases in value to $500,000. The $200,000 in gains is tax-free, and the parent only pays gift tax on the initial $300,000. However, if the parent dies before the trust expires, the tax benefits do not apply.
When you set up a QPRT, you can add caveats regarding outliving the trust, pertaining to adjoining land, and selling the home prior to the expiration date of the trust.
Contact Grissom Law, LLC today if you need to amend your estate or create a new estate.
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