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Qualified Personal Residence Trusts

A Qualified Personal Residence Trust (“QPRT”) offers a significant opportunity for estate tax savings for a homeowner whose estate is large enough to be subject to estate tax at death.

How does a QPRT work?

The way a QPRT works is you deed the title to the residence to the trustee of your irrevocable QPRT. The trust allows you to live in the residence for a specified retention term (e.g. 15 years). At the end of that term, the residence automatically passes to your named beneficiaries.

How does a QPRT reduce the value of the residence for estate tax purposes?

A QPRT saves estate taxes in two ways. First, IRS rules allow the house to be valued, at the time of the gift, at a value far less than the fair market value because of the grantor’s retained interest (the right to live there for a specified number of years). The value of the gift will be the FMV of the residence minus the value of the retained interest (based on the retention term and interest rates). Second, it “freezes” the value of the residence at the time of the gift so that any future appreciation is not included in the grantor’s estate.

An example:

A 65 year old parent transfers a house worth $800,000 to a QPRT for the benefit of his children with a 10 year retention term. The approximate value of the current gift would be $300,000. Assuming the residence appreciates 3% per year, the children will receive a house worth $1,075,000 at the end of 10 years. If, instead of the QPRT, the house were gifted outright to the children at the end of the 10 year term, the gift tax value would be $1,075,000, instead of $300,000. Even at the lowest marginal estate tax rate, this is a savings of $270,750.

What if I die before the end of the retention term?

If you die before the end of the retention term, the full value of the residence is pulled back into your estate. However, the original gift will also be treated as if it never occurred. The end result is that your estate will be treated as though the QPRT never existed – it would be a wash. In other words, there are NO ESTATE TAX NEGATIVES – a QPRT can only save estate taxes.

Can I live in the house after the retention term?

Yes. You can live there by paying a fair rental amount to the new owners. This is a great way of reducing your taxable estate even further without making a taxable gift. If this is your intention, you may want to discuss this with the beneficiaries as they are not “required” to allow you to live there. However, these beneficiaries are also likely beneficiaries of your primary estate plan, and it is not likely they want to do anything to disturb that. But, please note that you should not make any actual prearranged deals with the beneficiaries, as the IRS can then attack the QPRT as a sham.

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