A qualified personal residence trust is an irrevocable trust that allows the creator to remove a property from their estate. This is done to reduce the gift tax associated with assets when transferring them to a beneficiary. With this trust, the owner of the residence can remain living on the property with a retained interest in the house. After that set time period is over, the interest remaining is transferred to beneficiaries as remainder interest.
Throughout the length of the trust, the property’s value may increase, which is calculated using Internal Revenue Service (IRS) federal rates. Because the owner of the home has retained partial interest in the property, the gift value of the property is calculated at a lower rate, meaning the gift tax is also lowered. If you would like to learn more about transferring property to beneficiaries with gift tax savings, our team of estate planning attorneys can help. Call our law office today at 510-901-5375 for a free consultation.
How Does a Qualified Personal Residence Trust Work?
The goal of any qualified personal residence trust is to lower the gift value of a property to lower the rate at which it is taxed. For instance, let’s say you own your home and would like to pass it down to your child eventually. You’re not ready to move out just yet, but you know that the value of your home will increase over time, meaning you will be taxed at a higher rate. By setting up a qualified personal residence trust, you can stay in your house but reduce the impact of the increase in value when you pass it on to your beneficiary.
Let’s say that your home is currently worth $500,000. You talk to an attorney on our team and set up a qualified personal residence trust with a term length of ten years. You name your child as a beneficiary to receive your home once that term expires. Over the next ten years, your home value increases by $200,000. Fortunately, the increase in value is tax-free because your home was in a qualified personal residence trust. This means that when you pass your house on to your child, both gift tax and estate tax will be calculated at the original $500,000 value.
How Long Can the Term on a QPRT Be?
The term length of a qualified personal residence trust is one of the most important aspects of the trust itself. It is essential to pick a term length that expires before you pass away; otherwise, the property goes back into the estate and can be subject to both estate and gift tax. Fortunately, there is no set limit on the term length of a qualified personal residence trust.
Generally, term lengths for QPRTs are between ten and 20 years long. Longer term lengths create a more significant reduction in the gift tax, but they also have the potential to expire after you pass away. If you would like assistance with picking a term length for your QPRT, reach out to our legal team today.
What Are the Main Benefits of a QPRT?
Your personal property is likely a significant asset in your estate. By removing this asset, you can lower your taxable estate and the gift value amount almost immediately. Additionally, there are other benefits to a qualified personal residence trust that might be beneficial to your estate.
Those benefits include:
If the grantor lives beyond the trust’s expiration, the property’s full market value is removed from the estate, including any appreciated value.
The grantor maintains a partial interest in the property, meaning they can still possess and use the property as they see fit. Even after the trust expires, the beneficiaries can choose to rent back the property to the grantor so they can continue to reside there.
The grantor can name themselves as the trustee of the trust to control the property throughout the term.
Are There Any Drawbacks to a QPRT?
A qualified personal residence trust is an excellent option for many people. However, there are some disadvantages that may not make it the right choice for your estate.
The main disadvantages of a QPRT include:
A QPRT is irrevocable, meaning you cannot change or cancel the trust once it has been established. The only way a QPRT can be terminated before the term length is over is upon the grantor’s death.
If you have an outstanding balance on your mortgage, any payments made after the QPRT is established are considered “gifts” to reduce your tax exemption. You will no longer be able to refinance or use your property as collateral if needed.
A QPRT is an inherent gamble that may not pay off if you pass away before the term expires. If you do pass away before the term length is over, there are no benefits, and the property will go back into your estate and be subject to estate taxes.
The grantor of the trust must pay any QPRT income and expenses for tax purposes.
Should I Consult an Estate Planning Lawyer About a QPRT?
If you own a personal property and would like to pass it down to a family member one day, a QPRT might be for you. Our team will review your current estate plan and your financial goals to determine whether a qualified personal residence trust is in your best interest. If it is, we will draft the trust agreement for you and help you submit all the legal paperwork necessary for a valid QPRT. If you have questions about qualified personal residence trusts or just want to learn more, reach out to The Singh Law Firm today by calling us at 510-901-5375.