What is a qualified personal residence trust (QPRT)?

A qualified personal residence trust, or QPRT, is a form of grantor retained income trust. The purpose of this type of trust is to place assets into an irrevocable trust and only grant the income from the trust to the trustor. The actual asset in the trust will eventually pass to a listed beneficiary such as a child or grandchild. The advantage to a QPRT is that it freezes the value of the asset in the trust allowing it to pass with fewer tax consequences for the beneficiary.

Rules for establishing a QPRT

A qualified personal residence trust can only have one residence placed into the trust. The property is not purchased outright. Rather, six months of mortgage payments are deposited into the trust for the trustee to pay for the property. If there is any extra cash at the end of the six months, it must be returned to the trustor.

If the property for some reason becomes undesirable, it can be sold. Once sold, the proceeds are held in the trust and a new residence must be purchased within two years of the sale. Finally, the house must be used by the trustor as his primary residence for the specified amount of years. If it is not, then it cannot qualify for the QPRT shelter. If the trustor dies before the time runs out, then the entire property is added to their estate.

How a QPRT Affects Gift Taxes

The benefit of a qualified personal residence trust is that it eliminates a large chunk of the total gift taxes for the recipient of the property. The calculation for determining the final gift tax amount after the given period is as follows:

Remainder Value= Rt x (Y/X) x FMV of Home

Rt stands for the remainder factor taken from IRS table B for the number of years the trust is supposed to last. “t” is the IRS section 7520 rate at the time the trust is funded. The “X” is the number of people alive for the starting age for the trust. The “Y” is the number alive for the end of the trust period. Both “X” and “Y” can be found on IRS chart table 90CM.

So for instance, if the section 7520 rate is 8.2% and the trustor is 70 at the start of a 15-year QPRT. The home placed into the trust is worth $125,000. Rt is .5273; X for age 70 is 61,253; and Y for age 85 is 30,225.

The equation would look like:

.5273 x (30,225/61,253) x $125,000 = $32,524

So, the total remainder is $32,524. This is the taxable amount for gift tax purposes.

After the QPRT Term Expires

After the trust’s term has expired, nothing actually must change. While the beneficiary does own the property, they can allow the previous trustor to “rent” the property from them. However, the IRS does require that the rental price be the fair market rental value and the agreement must be official.

If a QPRT trust sounds like a useful estate planning tool to add to your estate planning portfolio, contact an estate planning attorney for a consultation.

Case Studies: Understanding Qualified Personal Residence Trusts (QPRTs)

Case Study 1: Estate Tax Mitigation With QPRT

John and Mary, a wealthy couple in their late 60s, own a valuable beachfront property worth $10 million. They want to pass the property to their children while minimizing estate taxes. To achieve this, they work with an estate planning attorney to set up a QPRT. They transfer the property to the trust and retain the right to live in it for a specific term, let’s say 15 years.

During this period, they continue to enjoy the property as their primary residence. The IRS tables determine the gift tax value of the transfer based on the chosen term, the current interest rate, and the property’s value. In this case, the gift tax value is determined to be $4 million. This means that only $4 million of the property’s value is subject to gift tax, while the remaining $6 million passes to their children tax-free.

Case Study 2: Maintaining a Family Vacation Home

Sarah and David, a retired couple, own a family vacation home in a popular tourist destination. They cherish the property and want to keep it in the family for generations to come. However, they are concerned about the potential for gift taxes and estate taxes that their children might face when inheriting the property. To address this concern, they establish a QPRT and transfer the vacation home into the trust.

They retain the right to use the property for a fixed term of 10 years while the trust is in effect. After the 10-year term, the vacation home will belong to their children, and any appreciation in its value during the trust’s term will be outside of their estate for tax purposes. By utilizing a QPRT, Sarah and David secure the vacation home for their children and future generations, reducing the tax burden for their heirs.

Case Study 3: Business Succession Planning

Mark, a successful business owner, wishes to pass down his primary residence to his son, Jason, who has shown interest in taking over the family business. However, Mark is concerned about the potential estate tax implications and wants to ensure a smooth business succession plan. He decides to establish a QPRT for his primary residence and transfers ownership to the trust.

The trust term is set for 15 years, during which Mark retains the right to reside in the property. After the trust term expires, the residence belongs to Jason. By utilizing a QPRT, Mark accomplishes two goals: he ensures a tax-efficient transfer of the property to Jason and sets the foundation for a successful business succession plan.