A device to remove the value of your personal residence from your estate and reduce your estate tax exposure is a particular type of irrevocable trust known as a QPRT or qualified personal residence trust. The QPRT removes the value of a residence from your estate at a greatly reduced gift tax cost. Taking advantage of the benefit of a QPRT requires the transfer of your residence to the trustee during your lifetime. The transfer of the residence to the trust is a taxable gift but you can subtract the value of your right to live rent-free in the residence for the term from the fair market value of the residence. Hence, the amount of the taxable gift should be substantially less than the fair market value of the residence.
Q: What happens if I die before the term of the QPRT?
If this happens, the home will revert back to your taxable estate for federal estate tax purposes. Because the home would have been included in your estate if you hadn’t made the transfer, there’s really no effect if you die during the trust term. You’re simply back where you started. The Idea is to outlive the QPRT to gain the estate tax advantages.
Q: Can I put both a primary residence and a vacation home into a QPRT?
Yes, however, two separate QPRTs will need to be established for each of the homes. Each QPRT may hold an interest in only one home. Therefore, if you wish to transfer your principal residence and a vacation home to a QPRT, you must create two separate trusts.
Q: Can I transfer my home and the surrounding land to the QPRT?
Yes, however, the IRS will consider your residence to include land adjacent to the home to the extent such land is reasonably appropriate for the residence, such as a farm with the farm house.
Q: Can I sell the house in a QPRT and buy another home?
You may sell the home. However, the proceeds from that sale must be used to reinvest in another house the QPRT will take title to and the home will be subject to the same trust provisions.
Q: Who can be the trustee?
You or a trusted friend can. However, you should also nominate a successor trustee in the event the acting trustee cannot act.
Q: Who pays maintenance, insurance, and real estate tax expenses?
You may pay them directly or transfer funds to the Trustee to pay them. However, you may only transfer an amount equal to six months of expenses to the Trustee.
Q: Can I claim the real estate taxes and other deductible expenses as deductions on my income tax return?
Yes, because the trust is a grantor trust, you are entitled to deduct the same expenses as when you owned the home.
Q: What can I do if I still want to live in my home at the end of the trust term?
You may enter into a lease with the remainder parties, usually your kids. The lease must be for whatever the fair market rental value of the home is. If the remainder parties are your children, the rent you pay them will be an additional way to further reduce the value of your estate.