A Qualified Personal Residence Trust (“QPRT”) is a type of irrevocable trust that takes ownership of your home, thereby providing some estate tax planning and asset protection benefits. As an “irrevocable” trust, the creator of the trust (often called the “grantor”) transfers ownership of the home to the trustee, and the trust in most circumstances cannot be changed to give the home back to the trust creator. Also, because this is an irrevocable trust, the home should receive asset protection from the liabilities of the grantor and the value of the home will not be included in the grantor's estate upon the grantor's death.
After the QPRT document is created, the grantor transfers the house to the trust, but retains the right to live in the house rent-free for a certain period of time, after which those rights go to the beneficiaries of the trust, which are often the children of the grantor. Frequently, after the term the beneficiaries/children will let the grantor stay in the house but then the grantor will need to pay fair market rent to the trust, which may also help with reducing the taxable estate of the grantor. Importantly, the grantor of the trust will still be able to deduct the property taxes and any mortgage interest paid on the home for so long as the grantor lives on the property.
Because the grantor retains the right to live in the house for many years, the transfer of the house to the QPRT uses less of the grantor's lifetime estate tax exemption (currently about $11.2 million per person) than the value of the house. In other words, the value of the home is significantly reduced for purposes of valuing the transfer into the trust, but then because the trust will then own the home, all future appreciation will occur in the trust and not be taxed to the grantor.
One of the major drawbacks of a QPRT is that the basis, or purchase price, of the home will carry over to the beneficiaries when the home is sold. Although the home can be eligible for the exclusion of gains on the sale of a personal residence of $250,000 for a single taxpayer or $500,000 for married taxpayers, it is not uncommon for the exclusion to not apply. Further, the home is not eligible for a stepped-up basis on the death of the grantor. As a result, a QPRT may not be a good fit for a home that will increase significantly in value and then be sold by the beneficiaries, especially if other assets can be moved outside of the grantor's estate and the capital gains from the home can therefore be protected from taxation. On the other hand, a QPRT may be a great fit for a home that will be kept in the family for multiple generations, especially if the estate tax exemption decreases significantly in the future.
- Estate tax savings for taxable estates can be significant and the grantor can further spend down assets on maintaining the property and then renting it out after the end of the term.
- Asset protection for the home so long as it is in the trust.
- It can be used to preserve a home for multiple generations.
- The grantor must outlive the term, or else the home reverts to the grantor's estate, defeating the purpose.
- Potential loss of personal residence exclusion on sale of the home and stepped up basis on death.
- Difficult to resolve a mortgage on the home or to refinance it after transfer to the QPRT.
A QPRT should not be used without a careful examination of your entire estate plan due to the many circumstances in which it could do more harm than good. However, for a person with a taxable estate, a QPRT may be a great fit to further reduce estate tax and preserve an asset for future generations. If you have any estate planning questions, please do not hesitate to contact Richard G. Pearce, Jr., Esq. and the attorneys at Litchford, Pearce & Associates, PLLC.