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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 tax generally incurred when transferring an asset to a beneficiary. According to law the QPRT is a suitable legal technique to shield an individual’s assets for their beneficiaries and protects those assets from creditors and judgments. An irrevocable trust cannot be changed in any way while the trust is in effect. This helps to guarantee that a judge cannot merely order a person to surrender protected assets to creditors or change the circumstances of the trust which would allow others to obtain the asset.
Once the residence has been transferred to the trust via a properly prepared and executed deed, the transferee(s) retain(s) the right to live in that home for a set number of years. While the owner is residing in the house, no rent would be paid. The owner is responsible for all housing expenses like repairs, real estate taxes, and maintenance fees which is covered by Revenue 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 tax. The beneficiaries can rent the home out to the original owner of the house. The most appealing part of this plan is that paying rent after the QPRT has ended the owner transfers additional assets to their beneficiaries without having to pay any gift or estate tax. Having received the rent money from the parents does not preclude them from giving the money back to the parents. If the house is sold, the proceeds from the sale can be used to purchase another house or other items for the parents as the beneficiaries’ desire.
The QPRT’s main advantage is the tax savings it provides to the property owner and the beneficiaries of the trust. When the residence is conveyed to the QPRT it counts as a gift but a typical IRS gift tax is not assessed. Instead the IRS computes a modified gift tax based on published tables and the total of time the home stays in the QPRT, which is applied to the value of the home. Once the time period of the trust ends, which is agreed upon when creating the QPRT, and the owner is still alive then the residence is passed on to the beneficiaries free of any gift or estate tax.
If the residence has appreciated in value since its original appraisal, the gift tax is based on that value of the home – based on the IRS calculations – and not on the increased value of the home. If the home’s value does not increase or stays the same then the beneficiaries would not have to pay any gift tax on the home.
Another benefit of the QPRT is the tax benefits can be enhanced if a husband and wife own the home jointly. According to Treasury Regulations section 25.2702-5(c)(2)(iv) a husband and wife can both transfer half their ownership in the home into two separate QPRTs. Each separate QPRT allows the husband and wife owners to live in the residence for a set number of years based on the conditions of each QPRT. In the case of one homeowner dies before the QPRT ends, the half that was in the trust would be put into the estate and be subject to estate and gift taxes. So what happens if you want to sell the house that is under a QPRT and buy a new home? The trustee of the QPRT would simply sell the old home and buy a new one in the name of the QPRT. If the value of the new home is greater than the old home, then the trustee would be required to pay out from separate funds and retain ownership for that portion of the house.
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