Qualified Personal Residence Trusts

A Qualified Personal Residence Trust, or “QPRT”, is a statutorily prescribed trust whereby a grantor can transfer a personal residence to heirs at a reduced transfer tax cost, while continuing to use the property for a specified term.

With a QPRT, a homeowner transfers a personal residence (either a principal residence or a vacation home) to a trust, retaining the right to use the residence for a term of years.  At the end of the term, the residence passes to the beneficiaries, usually members of the grantor’s family or a trust for their benefit.

For gift tax purposes, the value of the gift to heirs at the end of the term is reduced by the grantor’s retained right to use the property, thereby minimizing the transfer tax cost.  The longer the term, the greater the retained interest, and the lower the gift.  The value of the retained interest is determined under tables published by the Internal Revenue Service. 

A QPRT works best if the property transferred to the trust either increases in value, or at least does not significantly decrease in value.  It is also preferable if the grantor does not expect to sell the residence during the term (e.g., a family vacation home).

Since the grantor’s basis in the property will carry over to the beneficiaries, before QPRT planning is implemented, one should compare the transfer tax savings with the potential capital gains cost to beneficiaries.

With a QPRT, if the grantor dies during the trust term, then the entire trust property is included in the grantor’s gross estate.  Therefore, the term chosen should be one that the grantor is likely to outlive.  If the grantor is not in good health, then perhaps the grantor’s spouse may be a more appropriate transferor for these purposes.  In this case, the property could be transferred to the spouse gift tax free, and the spouse could create the QPRT.

A word of caution about QPRT's in our uncertain estate tax environment.  Since we currently do not have an estate tax in 2010, but we do have a gift tax, careful planning and consideration is in order before a QPRT is utlizied. 

For more information about QPRT's or how they may be utilized in your estate plan, please contact us for a free initial consultation.

 

The Law Office of Richard C. Petrofsky assists clients with Estate and Gift Planning, Wills, Trusts, Charitable Planning, Special Needs Planning, Elder Law and Medicaid Planning, Estate and Family Planning for Same-Sex Couples and LGBT Individuals, Asset Protection Planning and Corporate and Business Planning in St. Louis, Missouri and surrounding areas.