Qualified Personal Residence Trusts (QPRTs)
This type of irrevocable living trust is designed to minimize the impact of estate and gift taxes by reducing the value of the grantor’s personal residence upon death. It lets the grantor transfer ownership in a home to the trust while continuing to live there rent-free during the trust term. Once the trust term is over, ownership of the residence is passed to the beneficiaries. The grantor can choose to rent the residence from them at fair-market value in order to stay in the home and reduce estate value further.
The term “personal residence” can mean the grantor’s primary residence, a secondary residence (such as a vacation home) or an undivided fractional interest in either one. The grantor can transfer ownership of up to two residences as long as one of them is the primary residence. If a vacation home is placed into the trust, the grantor may rent it out to others but must live there for more than 14 days or 10% of the number of days rented, whichever is greater.
- The residence’s value is frozen as of the time the trust is created―and if it appreciates during the trust term, that amount is not subject to estate tax.
- The Internal Revenue Service calculates the value of the remainder interest for gift tax purposes using the length of the trust term, the current theoretical interest rate and the grantor’s life expectancy. If the retained interest is greater than zero, the residence’s value and the resulting gift tax will be lower.
- Grantors can still claim an income tax deduction for any real estate taxes they pay even though they no longer own the residence in the trust.
- The advisability of choosing this type of trust is highly dependent on what the federal interest rate is at the time the trust is created. The lower the federal rate is, the higher the value of the residence will be, meaning the gift tax will be higher.
- To avoid the consequences of the grantor dying before the trust term is over, some advisors set up multiple QPRTs with different term ranges (e.g., 5, 10 and 15 years).