How does a Qualified Personal Residence Trust work?

August 19, 2015

in Trusts

| Aug 19, 2015

Trusts

There are many kinds of trusts that can be used to avoid probate, avoid taxes and transfer assets to loved ones or other beneficiaries, such as a charitable organization. Today, though, let’s talk about the benefits of a trust that allows you to transfer your home to a loved one while avoiding future estate tax issues.

It’s called a Qualified Personal Residence Trust — or QPRT.

In fact, a QPRT allows you to transfer not only your primary residence, but also one vacation home, if you own one, all at a reduced gift value. Here is how a QPRT works.

A QPRT is a kind of irrevocable trust. You choose a beneficiary — your child, perhaps, or another descendant — to whom you transfer ownership of the property. You can make the transfer while continuing to live in the home.

What this does is remove the home from your estate. Doing this shields the property from creditors if you have them, and your heirs will not have to pay estate taxes on the property upon your passing. A QPRT is therefore an excellent option particularly for people with a high-value home.

When you create a QPRT, your home is held in the trust — but only for a limited time. You can live in the residence while it is held in the trust, and when the trust terminates, the home will be removed from your estate and transferred to your chosen beneficiary, but without the burden of gift or estate taxes.

If you create a rental agreement with your beneficiary, then you can actually continue living in the home after the termination of the QPRT.

A few important notes:

  • A QPRT is a gift, so a home held in a QPRT is not treated the same as a home that is otherwise transferred to your heirs upon death.
  • For the residence to be excluded from your estate and thus not subject to estate taxes, you must outlive the duration of the trust.
  • If the beneficiary sells the property, then there could be capital gains taxes that effectively cancel out any estate tax benefit.

For more on other kinds of trusts that could benefit your estate, please see our page on “Trusts and Other Planning Techniques.”