If you own a home or two, you may want to learn more about a qualified personal residence trust, also called a QPRT (pronounced "Q-pert"), which can remove the value of your primary or secondary residence from your estate and potentially help you save money on federal estate and gift taxes.
How Qualified Personal Residence Trusts Work
An irrevocable qualified personal residence trust requires that you transfer the ownership of your home into the trust. Because you are not the owner of the house at the time of your death, the value of the property is not included in your estate, effectively removing it from being subject to estate tax.
With a QPRT, you retain the right to live in the property for the term of the trust without paying rent. At the end of the term, your named beneficiary takes ownership of the property. If you die before the term of the trust expires, the value of the house would be included in your estate for estate tax purposes.
To avoid this possibility and achieve estate tax savings in a different way, another option is a non-qualified personal residence trust (NQPRT), which also holds a home but does not exclude its value from estate taxes. An NQPRT operates quite differently in that it involves a property transfer to the trust in exchange for a self-canceling installment (SCIN), and the grantor does not continue to live in the home rent-free.
Qualified Personal Residence Trust Pros and Cons
Whether to include a QPRT in your estate plan depends upon your individual financial situation.
You may want to consider the pros of a QPRT, which include:
- Reduced taxable estate. The biggest benefit of a QPRT is that it removes the value of your primary or second home and its appreciation from your taxable estate.
- Continued use of the property. With your home in a QPRT, you can still live in the property rent-free and enjoy any income tax deductions associated with it.
- Gift tax benefits. You may avoid gift tax liability for giving your residence away, either by falling under the exemption amount or by locking in the current value of your home even if the exemption amount is eventually reduced. Moreover, the gift tax calculation also takes into account the period of time the beneficiaries must wait before assuming ownership.
There are some cons, however, to establishing a QPRT:
- Irrevocable. Putting your residence into an irrevocable trust is a big commitment, because you generally cannot change its terms or cancel the trust. In other words, once established, the qualified personal residence trust termination happens only upon your death.
- Possible reversal. If the grantor dies before the term expires, estate tax benefits are lost because the property will be included in the estate. Moreover, qualified personal residence trust requirements dictate that the grantor must continue to use the home for a certain number of years or it loses its qualified status.
- Mortgage issues. If the property has a mortgage, part of the mortgage payments are considered gifts that count against the gift tax exemption. Moreover, because the trust—not you—is the owner of the home, you cannot refinance the property through a second mortgage and use it as collateral.
- Income tax. QPRT income and expenses are taxed to the grantor.
Overall, it is important to remember that if it's not created and maintained properly, you would lose any qualified personal residence trust protection you sought to have.
Indeed, setting up and maintaining a QPRT can be incredibly complex, so you should seek professional advice, such as that of an online service provider, to make sure your estate plan is as comprehensive as possible.