Early Termination of a QPRT: What You Need to Know
A qualified personal residence trust can be a way to protect a property asset during your lifetime while ensuring that it passes on to beneficiaries without being part of your taxable estate. However, when creating this type of trust, it’s critical to consider long-term needs and plans so you can ensure the trust serves future needs for you and your loved ones.
Even the best-laid plans don’t always align with life’s events. When considering a QPRT, you may wonder whether you can terminate it early or make changes to it.
Common Terms and Conditions of a Qualified Personal Residence Trust
Before answering the question about early termination of a QPRT, it helps to define some common elements of these trusts.
- The grantor. The grantor is the person creating and “funding” the trust. In the case of a QPRT, typically this is the person who owns the residence in question and is transferring ownership of the residence into the trust. As the grantor, you can set the trust up so you retain the benefits of the residence, including living in it, for a certain period of time.
- The personal residence. The personal residence is the qualifying home that is put into the trust. It can be a primary residence, a secondary residence, or a vacation home. Typically this is the only asset that is put into the trust.
- A fixed term. You decide on a term for the trust that allows you to live in the home or continue to benefit from the property as the primary user. This term is fixed, though you can choose it. For example, a fixed term might be five years, but it could also be a longer period such as 20 years. Talk to your attorney about the pros and cons of various terms to figure out what might be best for you.
- The beneficiaries. Once the fixed term is over, the benefits of the property pass to the beneficiaries named in the trust.
Why Might Someone Seek to Terminate a QPRT Early?
You may want to terminate a QPRT for a variety of reasons. Perhaps you need to engage in a transfer of a personal residence via sale because you need to move states or downsize due to a change in financial status. You may also determine that the estate plans that involved the QPRT no longer make sense to you or your family.
Is it Possible to Terminate a QPRT Early?
No matter why you want to make a change to or terminate a QPRT, it can be difficult to do so unless you have planned specifically for these potential scenarios. QPRTs are irrevocable trusts, which means the specific provisions of the trust can’t be revoked or edited later, and once you place assets into this type of trust, you can’t simply take them out again because you changed your mind.
However, if you plan ahead, you can build provisions into the trust that provide some flexibility in the future. If the trust agreement includes the option, you can terminate the trust altogether. This allows ownership of the property to be returned to you. However, this negates any tax advantage you created with the trust and could leave you with a large tax burden if the property value has increased. This could also create some unnecessary risk for the property in situations involving creditors or lawsuits.
Another way to build in potential flexibility for the future is to create a provision that allows the property in the trust to be sold by the trust. The proceeds of that sale can then be used to purchase a different home for your use while you are in the fixed term, or the cash might be invested and the proceeds distributed annually during the fixed term. This allows you to retain the protective and estate-planning benefits of the trust while maximizing potential benefits even if life needs or preferences change in the future.
A third way a QPRT might be terminated early is if the grantor dies within the fixed period. In this case, the QPRT is reversed and the property may be added back to the taxable estate.
Are There Other Options You Might Consider?
A qualified personal asset trust is not your only option when planning ahead for the protection and passing on of real property. Some other options can include:
- A split purchase annuity trust
- A grantor retained trust
- A domestic asset protection trust
- A spousal lifetime access trust
You have to consider a wide range of factors when determining which trust type might be right for you. That includes what is allowed in the jurisdiction you’re planning within. For example, California is not one of the states that allows a domestic asset protection trust.
Talk to an Estate Law Attorney About Your Trust
The first step in protecting your assets via estate planning is talking to experienced attorneys. A legal team that is adept at estate planning in your state can help you understand all your options and create a strategy that aligns with your personal needs, financial situation, and goals for the future.
Talk to the team at the Singh Law Firm today to begin your journey to wealth and asset protection. You can make an appointment in Silicon Valley by calling 510-901-5375 or connect with our Los Angeles office at 818-658-2174.
