Qualified Personal Residence Trust ["QPRT"]

Another estate planning idea that is seldom used, but quite useful to minimize estate and gift tax liability and improve creditor protection is the Qualified Personal Residence Trust ["QPRT"].

What is it?

A QPRT is an irrevocable trust wherein the grantor transfers title to his/her personal residence to the QPRT while still living in the house for a "term of years" -- usually seven (7) years. The beneficiaries of the trust are usually children or family members.

The personal residence can be the primary home of the grantor or a vacation home. The grantor must be living in the home at the time of transfer to the trust.

Pros and Cons:

Pros:

The grantor's transfer of the home to the QPRT reduces the taxable gift value of the home because the grantor continues to live in the home for the term of the trust.

So if the home's value increases, this appreciation together with the interest in the home that the grantor still owns, is not considered part of the grantor's estate and thereby avoids estate tax liability.

Probate is also avoided because the trust beneficiaries will own the home at the end of the "term of years".

Cons:

The main disadvantage of a QPRT is that if you die before the end of the "term of years", the grantor cannot reduce the entire value of the home out of his/her estate. One way to avert this risk is to buy life insurance and put it in an Irrevocable Life Insurance Trust ["ILIT"] to pay any potential estate taxes.

Another disadvantage is that in a high interest rate environment, the grantor's retained interest in the home is higher thereby making the gift value less.

In a low interest environment, the value of the grantor's interest in the home lessens, but the value of the gift is higher.

One of the main disadvantages is that when the "term of years" ends, if the grantor wants to continue living in the home, he/she has to pay rent.

Please note that even though the QPRT now owns the home, the grantor still has to pay the house expenses. The grantor would pay the QPRT trustee directly and the trustee would then pay any creditors.

Almost everyone should consider the QPRT in their estate planning -- it is a great estate planning tool.

Need more information? Please feel free to contact the Attorneys at Santaella Legal Group, APC. We welcome your comments and questions.