What is a Qualified Personal Residence Trust (QPRT)?
A Qualified Personal Residence Trust (QPRT) is an irrevocable trust and that may significantly reduce the estate tax consequences of the family home and one vacation home. The QPRT also provides an excellent asset protection vehicle since you no longer own the property once the trust is established. An individual creates a QPRT by transferring his residence and/or vacation home to an irrevocable trust (usually for the benefit of family members) but retaining the right to use the residence rent-free for a specified period of time.
What does a QPRT do?
The grantors primary or secondary residence is transferred into the trust for a set period of time. The Grantor may continue to use the residence during the duration of the trust, however once the trust ends the residence will pass on to the beneficiaries of the trust; the grantor may rent the residence from the beneficiaries after the trust has terminated.
What are the benefits of utilizing a QPRT?
The principal benefit of using a QPRT is the removal of the value of a primary or secondary residence from your estate at a reduced gift tax value; and will remove the value of the property from your estate for estate tax purposes. Such gift tax value is fixed on date of a contribution to the QPRT, and no further gift or estate tax is imposed upon the trust assets so long as the grantor survives to the end of QPRT Term.
Therefore the older the grantor and the longer the QPRT Term, the lower the gift tax value of the remainder interest. This would suggest that the QPRT Term should be as long a term as possible.
What are the disadvantages?
A critically important aspect of planning with QPRTs is that, should the grantor die during the QPRT Term, the assets held in the QPRT are included in the grantor's taxable estate. Consequently, structuring a QPRT requires a careful balancing of the desire to drive the gift tax value of the remainder interest as low as possible while managing the risk of the grantor's death during the QPRT Term. Occasionally this balancing act can be struck by selecting a relatively long QPRT Term and purchasing term life insurance on the grantor's life to cover the QPRT term.
Who needs a QPRT?
If you are looking to maximize the use of your lifetime gift tax exclusion and estate tax exemption, a QPRT may be for you. QPRTs also allow for your family home or a vacation property to be passed down to your children so that they can preserve it for the use and benefit of their children and future generations within your family.
For information, please contact Brian Chew at 949.288.3598 or fill out the contact us form.