QPRT Limits: Does It Work for a Non-Primary Residence?
Individuals and families seeking to create generational legacies have many estate planning tools to turn to. Trusts are commonly used to support these types of goals, and specific types of trusts may be helpful in certain situations. For example, a qualified personal residence trust may be an appropriate choice if you want to pass on a home. But does this trust type work for homes you don’t primarily live in?
What Is a Qualified Personal Residence Trust?
A Qualified Personal Residence Trust, or QPRT, is a specific type of trust designed to hold ownership of a home or other residential property. It’s an irrevocable trust, which means it’s very difficult, if not impossible, to change it after it goes into effect. When you move the ownership of a property into the trust, it removes it from your estate, which can reduce any tax burdens associated with gifting the property to someone else in the future.
Typically, someone creates a QPRT with the intention of continuing to benefit from the residence in question themselves for a period of time. Those benefits then transfer to beneficiaries, such as a spouse, children, or grandchildren.
What Properties Are Eligible for a QPRT?
While this is called a personal residence trust, the property you put into it does not have to be your primary residence. These trusts can hold:
- A principal residence
- A second home that you live in for part of the year
- A vacation home
- Partial ownership of a residence
However, you can only have a QPRT for two residences at a time. If a residence is partially owned by different people, that property might be included in more than one QPRT.
Note that the surrounding land related to the residence in question is typically considered part of the home and can be included in a QPRT. However, the IRS does draw some lines about how much land can be included based on where the property is, how it’s used, and the size of the land in relation to the size of the home. Talk to an estate attorney about whether land related to a home can be put in a QPRT.
Why Establish a QPRT for a Vacation Home?
Some benefits of putting a vacation home in a QPRT include:
- Reducing the value of your estate, which helps decrease future estate taxes
- Reducing gift tax burdens if you want to pass the property on to a loved one
- The ability to keep using the vacation home or second property yourself for the duration of time specified in the trust
Are There Any Disadvantages to Consider?
You only retain an interest in the trust and benefit from it for a specific period of time, which is set when you create the QPRT. It can take some careful consideration to determine what time period might be right. If you choose a time period that is too short, you may not have the desired benefits out of your second home or vacation home—or you may need to pay other beneficiaries for those benefits. In contrast, if you choose a time that is too long, you may put the benefits of this trust at risk if you pass away before the QPRT period is over.
Some professionals recommend considering a variety of data points, including actuarial tables, in determining the details of a QPRT.
Why You Should Consult With Knowledgeable Estate Planning Attorneys
QPRTs are technical legal documents. They can be complex, and an error in a seemingly small detail in setting up these trusts can reduce the benefits you get from them or create unnecessary problems for you or your heirs in the future. Working with an estate planning attorney can mitigate those challenges, as you have the guidance of a legal team that’s experienced in these matters.
Some reasons to work with knowledgeable estate planning attorneys when you want to protect real estate, including a second home or vacation home, include:
- Getting guidance about your options. Your estate planning lawyer can explain all your options for protecting and passing on property like a vacation home. While a QPRT has a number of benefits, it may not be the best choice for your circumstances.
- Ensuring documents are complete and accurate. Once you decide on a course of action, your attorney’s office completes all the necessary paperwork and filings. This ensures trust or other documents are accurate and created in a way that best protects your interests.
- Addressing legal challenges in the future. If any issues arise in the future or you have any questions about your trust or other estate plans, you can turn to a legal team who is already familiar with your case. This is also true if your financial or life situation changes and you would like to talk about editing your estate plans.
- Supporting a balance of legal and financial planning. Estate planning attorneys can help you address a variety of plans, including financial, legal, and tax matters, as you look toward the future and the preservation of wealth. They may also provide guidance about when it’s time to bring in other professionals, such as accountants or financial managers.
- Integrating your plans with a holistic approach to estate planning. Working with an estate planning lawyer ensures your actions regarding a second or vacation home are in line with your other estate plans.
To start the process of protecting a vacation or second home, reach out to the Singh Law Firm in Silicon Valley by calling 510-901-5375. You can also reach our Los Angeles office at 818-658-2174.
