What is a Qualified Personal Residence Trust (QPRT)?

Definition:

A Qualified Personal Residence Trust (QPRT) is a special type of trust designed to hold your primary or secondary home and remove its value from your taxable estate.

What is QPRT?

A Qualified Personal Residence Trust (QPRT) is a trust that allows you to transfer your primary or secondary home to a future beneficiary while providing a gift tax exemption. Once the home is placed in the Qualified Personal Residence Trust, you can continue to live in the home until a specified date, at which point the ownership will pass to the beneficiary. Any value that appreciates in the home between the time you establish the trust and the transfer of ownership will not be counted for tax purposes. Estate taxes will only apply to the value on the day the trust was created.

How does QPRT work?

Let’s say you want your child to inherit your home, but you’re not ready to move yet. To minimize the impact that retaining the home will have on your taxable estate, you can establish a Qualified Personal Residence Trust for a term of 10 years.

Assume that the value of the home is $400,000 at the time you create the trust. After ten years, it might appreciate to $550,000. This increase in value occurs without tax implications because the value of the home in the trust is $400,000. After ten years, the home will transfer to your child, and you will be responsible only for gift tax on the original value of $400,000.

How to obtain a QPRT?

There are several steps involved in creating a Qualified Personal Residence Trust:

1. Draft the necessary trust agreement: You need to specify who will be the initial trustee and successor trustee, how long you wish to retain the right to live in the home (known as the retained income period) before it passes to the ultimate beneficiaries, and who the ultimate beneficiaries of the trust will be at the end of the retained income period.

2. Fund the trust with your home: You also need to transfer the title of your home to the name of the Qualified Personal Residence Trust. This is done by recording a new deed from your name to the trust’s name in the land records where the property is located.

3. Get an appraisal of your home for gift tax purposes: As part of the transfer, you will also need to obtain an appraisal of the home on the date it is transferred to the name of the trust from a licensed real estate appraiser. This is necessary to determine the fair market value of the property for gift tax purposes.

4. Report your gift to the IRS: The next step is to file Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return, with the federal tax authorities, which is due on tax day (typically April 15) of the year following the transfer of the home to the Qualified Personal Residence Trust. The transfer of the home to the Qualified Personal Residence Trust is considered a gift to the ultimate beneficiaries of the trust for federal gift tax purposes. If you live in a state that also imposes a state gift tax, you will also need to file a state gift tax return.

After establishing your QPRT

During the retained income period of the Qualified Personal Residence Trust, you can continue living your life as usual. You’ll be able to live in the home without paying rent and benefit from all appropriate tax advantages. You will also be required to maintain and repair the home for the benefit of the ultimate beneficiaries of the Qualified Personal Residence Trust.

At the end of the retained income period, the trustee of the Qualified Personal Residence Trust must transfer ownership of the home from the name of the trust to the names of the trust’s ultimate beneficiaries. This is done by recording a new deed from the trust’s name to the names of the beneficiaries in the land records where the property is located.

After the retained income period ends, you will need to pay fair market rent if you wish to continue living in the home full-time or if you want to use it periodically, such as for vacations. Paying rent will help reduce the value of your taxable estate and pass more assets to the ultimate beneficiaries without using more of your gift exemption, as rental payments will not be considered gifts to the ultimate beneficiaries.

Source:

https://www.thebalancemoney.com/what-is-a-qualified-personal-residence-trust-3505404

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