What Is a Qualified Personal Residence Trust (QPRT)?

Qualified Personal Residence Trusts Attorney: What Is a QPRT?

A Qualified Personal Residence Trust takes your personal residence out of your estate for estate tax purposes, and has some advantages, especially when it comes to taxes. QPRTs can help reduce the taxable value of a property for estate tax purposes. The QPRT is a type of irrevocable trust, so once it is created, it is permanent and cannot be reversed. The QPRT is also a type of grantor trust, meaning that the trust creator or grantor may take advantage of gift tax exemptions and estate tax exemption for property placed in the trust, explains the article “Qualified Personal Residence Trust (QPRT)“ from Yahoo! finance.com. The current federal estate tax exemption limits can significantly impact estate planning decisions, given the looming changes in tax law.

As a grantor, you can live in the home for a period of time with a retained interest in the property. Once the QPRT term ends, ownership of the property gets transferred to the beneficiaries of the trust.

When you establish a QPRT, you take your personal residence, a primary or secondary home, out of your estate and place it in the trust. While the trust is in place, you and your family may live in the home, and you continue to be responsible for maintaining the property and paying the property taxes. The fair market value of the property is used for estate and gift tax calculations, which can directly affect the taxable amounts.

Any appreciation that occurs after the transfer takes place is also removed from your estate, leading to potential estate tax savings. Because you retain an interest in the residence, you can reduce the amount of property’s fair market value that is subject to estate and gift taxes from your estate. The potential for substantial tax savings is significant if the donor survives the term.

However, there is one rule you need to know before setting up the QPRT—you must outlive the term of the trust. If you don’t, the entire value of the residence may be included in your taxable estate, which destroys the key reason for setting up the trust. Establishing a QPRT can reduce the total value of a taxable estate by removing the primary or secondary home from the estate.

This is a complex tool for estate planning, and it isn’t for everyone. A QPRT can be good for creating a financial legacy for beneficiaries, helps your estate avoid taxes after your death and if you are paying rent to trust beneficiaries, creates another path to minimize gift and estate taxes. QPRTs can significantly reduce the value of a taxable gift.

On the other hand, a QPRT is irrevocable. Therefore, if your circumstances change, it may not be useful for you but you won’t be able to undo it. If you die before the end of the term, any benefits for gift tax purposes or estate taxes are lost. If there is a mortgage on the property, mortgage payments might be counted against gift tax exemptions. QPRTs allow Grantors to transfer property to heirs while reducing the property’s value for gift tax purposes.

Attempting to refinance a home that’s owned by a QPRT is difficult and, in many circumstances, not even possible. You don’t own the home, the trust does. Therefore, the property cannot be used as collateral. Selling a home that is owned by a QPRT is also far more complicated than selling the property if you owned it outright. Property owners must manage ongoing expenses like maintenance, insurance, and real estate taxes.

Selling a home that has been transferred into a QPRT can lead to the conversion of the QPRT into a grantor-retained annuity trust (GRAT), particularly when the QPRT home is sold without reinvestment of the proceeds or when the home ceases to be a personal residence.

An estate planning attorney will analyze your estate and tax situation to determine if a QPRT is a useful tool for you and your family.