Qualified Personal Residence Trust (QPRT) Steps and Benefits
Transferring a residence to a qualified personal residence trust (QPRT) is a and the trustee must distribute the assets outright to the grantor or convert the QPRT to . the nontax factors, including family relationships, before setting up a trust. Do you understand the ins and outs of a Qualified Personal Residence Trust . Retention of an interest as a trustee could lead to additional income tax or estate . A qualified personal residence trust (QPRT) is a trust to which a person (called of the QPRT, and the trustee must adhere to the terms of the trust. . If the QPRT is modified or the relationship with the house changed (e.g.
Plus, the parties are not, by and large, legally obligated to comply with order an individual to change it. This helps to ensure that a judge cannot simply order a person to hand those protected assets to creditors.
The transferee s retain s the right to live in that home for a set number of years. During this time when the owner is living in the house he would not be paying rent.
He would be responsible for all housing expenses like repairs, real estate taxes, and maintenance fees which is covered by Revenue Procedure [ IRB section 4 Art. Suppose the owner is alive after that predetermined number of years.
The trust does this without triggering the estate tax. Now I know what you may be thinking.
Qualified personal residence trust
One such provision is that the beneficiaries must rent the home out to the original owner of the house. The attractive part is this. By paying rent after the QPRT has ended, a person is transferring additional assets to their beneficiaries; without having to pay any gift or estate tax. There is nothing stopping the kids from paying the rent money back to Mom and Dad. Plus if you decide to sell the house, the trust can use the proceeds to purchase another residence.
In addition, it can cover other items for the parents, as the beneficiaries see fit. At the same time, the owner can still live in the house while the trust is in effect. This means while the residence is held within the QPRT it is protected from judgments and creditors.
The structure provides this shield for the lifetime of the trust.
Qualified Personal Residence Trust – QPRT
The owner can also live in the residence during the duration of the QPRT. They are able to maintain control of the residence. This means that the owner can still remodel or update the home. They can proceed without any restrictions from the trust.
It provides these to both the property owner and the beneficiaries of the trust. Instead, the IRS calculates a modified gift tax. The IRS determines this through their published tables and the amount of time the home stays in the Qualified Personal Residence Trust.
They apply this to the value of the home. The predetermined amount of time is agreed upon when creating the QPRT.
When this time has passed and the owner is still alive then the trust passes the home on to the beneficiaries. Again, this is free of any gift or estate tax. So, how does the gift tax apply when the trust passes the house on to the beneficiaries?
If the home has appreciated in value since its initial appraisal, the gift tax would be based on the initial value of the home. Incidentally, the IRS determines this using their own calculations — and not on the final value of the home. This would save the beneficiaries a great deal of money. That is because they would have to pay a gift tax on the initial value of the home and not on the appreciated value. In that case, the beneficiaries would not have to pay any gift tax on the home.
This seems like a strange notion but there is a tax benefit. By paying rent, the original homeowner is transferring assets to his beneficiaries without having to pay any sort of gift or estate tax on those assets.
In a QPRT the homeowner is essentially betting that they will live longer than the lifespan of the trust. But what happens if the owner dies before the trust ends?
If the QPRT status of the trust terminates as to the cash, then the cash comes back into the grantor's estate. Grantor status is important, because it will allow the grantor to take mortgage interest and property tax deductions, and will also avail the grantor of the Code Section gain exclusion. Following the expiration of the residence term, the grantor status of the trust usually ceases, unless the trust is drafted in a manner to make the trust intentionally grantor following the expiration of the term.
This may be advantageous if the trust holds a vacation home and the grantor wishes to deduct mortgage interest and expenses associated with that home. Estate and gift tax aspects of residence trusts[ edit ] If a grantor dies during the retained term of a residence trust, the full value of the trust property is included in the grantor's estate under Code Section a 1 because the grantor retains the right to possess or enjoy the property. If the grantor retains a reversionary interest during the retained term of the trust, the value of the residence is included in the grantor's estate under Code Section However, it is usually prudent to include in a QPRT a contingent reversionary interest during the retained term of the trust.
If the grantor dies during the retained term, the residence is included in the grantor's estate whether or not there is a reversionary interest. But, if there is a reversionary interest, the age of the grantor now comes into the valuation of the retained interest.
Because now there is a possibility that the grantor will die within the retained term and the remainder beneficiaries will then receive nothing, the value of the retained term increases and the value of the remainder interest decreases only the transfer of the remainder interest is subject to the gift tax, so it is beneficial to decrease its value.