GIFT YOUR RESIDENCE TO YOUR BENEFICIARIES DURING YOUR LIFETIME, CONTINUE TO RESIDE IN IT AND SAVE TAXES
WHAT IS A QPRT?
A qualified personal residence trust (QPRT) is a trust typically designed to transfer a primary residence (*) to your beneficiaries during your lifetime which, if you elect, permits you to serve as the trustee. The term of the QPRT is usually between 10 and 20 years. QPRTs are governed by IRS Section 2702(a)(3)(A)(ii).
CAN I LIVE IN THE HOUSE DURING THE TERM OF THE QPRT?
You may live in the property until the end of the term, but you are required to pay all taxes and expenses associated with the residence, just as if you still owned it.
WHAT OCCURS AT THE END OF THE QPRT’S TERM?
At the end of the term, the ownership of the home will be conveyed to your beneficiaries or to a trust for their benefit. At that juncture, you must enter into a lease agreement with the beneficiaries or trust and actually pay that rent. Otherwise, the IRS could argue upon your death that the property should be included in your estate because the QPRT was never valid.
DOES THE CREATION OF A QPRT DECREASE THE VALUE OF MY ESTATE?
If you were to give your home today to beneficiaries, free and clear, the value of the gift would be equal to the fair market value of the home. However, by gifting the residence to a QPRT; you remove the asset from your estate, lower estate taxes at the time of your death, and take advantage of the individual lifetime gift tax exclusion of $5,340,000.
WHAT ARE THE FACTORS THAT INFLUENCE THE VALUE OF THE GIFT?
The exact value of a gift made through a QPRT depends on several factors, including but not limited to:
- Your age upon the creation of the QPRT;
- The market value of the home as determined by a qualified appraiser; and
- The length of the term of the QPRT. The longer the term of the trust, the lower the taxable gift.
WHAT ARE THE RAMIFICATIONS IF I OUTLIVE THE TERM OF THE QPRT?
In order for a QPRT to succeed, you must outlive the trust term. If you die before the end of the term, the home will be brought back into your estate and subject to estate taxes.
The value of the QPRT gift also depends on the IRS interest rate that is in effect for the month when the QPRT is created because it is used to calculate the present value of the beneficiaries’ remainder interest. The higher the interest rate, the smaller the gift associated with the QPRT. The IRS interest rate has been very low for the past few years, but as it starts to move upwards again, QPRTs will generally become increasingly attractive.
A QPRT is an excellent estate planning tool if structured with foresight and reasonable assumptions. It allows you to optimize the value of your home from both a gift tax and estate tax perspective while enabling you to retain the use and enjoyment of your residence for many years.
Gary Ringel, CGREA, Managing Director, Henry & Horne Business Valuation & Litigation Support Services Group
(*) The dwelling can also be a vacation home or boat as well as structures appurtenant to it.
One of the sources for this blog is an article published by Brown Brothers Harriman & Co. that was written by Michelle J. Hong, Vice President and Director of Wealth Planning.