What is a Qualified Personal Residence Trust (QPRT)?
A QPRT is a form of irrevocable living trust designed to reduce the amount of gift and estate tax typically incurred when transferring an asset to a beneficiary. According to the law, the QPRT is an adequate legal technique to protect the assets of an individual for the beneficiaries of it and protects those assets from creditors and lawsuits. An irrevocable trust cannot be changed in any way while the trust is in effect. This helps ensure that a judge cannot simply order a person to turn over protected property to creditors or change the circumstances of the trust that would allow others to obtain the property.
Once the residence has been transferred to the trust through a duly prepared and executed deed, the assignees retain the right to live in that house for a certain number of years. As long as the owner resides in the house, no rent will be paid. The owner is responsible for all housing expenses, such as repairs, property taxes, and maintenance fees, which are covered by Revenue Procedure 2003-42. [2003-23 IRB 993 section 4 Art. II (B) (2)]. If the owner is still alive after that predetermined number of years, the trust automatically transfers ownership of the home to the owners’ beneficiaries without having to pay estate taxes. Beneficiaries can rent the house to the original owner of the house. The most attractive part of this plan is that by paying the rent after the QPRT ends, the owner transfers additional assets to the beneficiaries of it without having to pay any gift or inheritance tax. Having received the rent money from the parents does not prevent them from returning the money to the parents. If the home is sold, the proceeds of the sale can be used to purchase another home or other items for the parents as desired by the beneficiaries.
The main advantage of the QPRT is the tax savings it provides to the owner of the property and the beneficiaries of the trust. When the residence is transferred to the QPRT, it counts as a gift, but a typical IRS gift tax is not calculated. Instead, the IRS calculates a modified gift tax based on the published tables and the total time the home remains in the QPRT, which is applied to the value of the home. Once the time period of the trust ends, which is agreed upon when creating the QPRT, and the owner is still alive, the residence passes to the beneficiaries free of any gift or inheritance tax.
If the value of the home has increased since its original appraisal, the gift tax is based on that value of the home, as calculated by the IRS, and not on the increase in value of the home. If the value of the home does not increase or stays the same, the beneficiaries will not have to pay any gift tax on the home.
Another benefit of the QPRT is that tax benefits can be enhanced if a husband and wife own the home jointly. Pursuant to Treasury Regulations section 25.2702-5(c)(2)(iv), a husband and wife may transfer half of their property in the home to two separate QPRTs. Each separate QPRT allows the owners, husband and wife, to live in the residence for a set number of years based on the terms of each QPRT. In the event that an owner dies before the QPRT ends, the half that was in the trust would be put into the estate and would be subject to inheritance and gift taxes. So what if you want to sell the house that is under a QPRT and buy a new house? The trustee of the QPRT would simply sell the old house and buy a new one in the name of the QPRT. If the value of the new house is greater than the value of the old house, then the trustee must pay from separate funds and retain ownership of that part of the house.