CA Estate Planning Blog

Wednesday, March 14, 2018

Qualified Personal Residence Trusts Explored

Is a Qualified Personal Residence Trust (QPRT) an irrevocable trust?

A Qualified Personal Residence Trust (QPRT) is a type of irrevocable trust that allows you to place your home or a secondary residence into the trust for tax benefits.  QPRTs are a popular estate planning tool that can help you to reduce the size of your taxable estate.  As an irrevocable trust, a QPRT cannot easily be altered, making it important that you consult with a trusts and estate planning lawyer to ensure this estate planning vehicle is right for you.  

Benefits of a QPRT

There are several tax advantages to a QPRT.  Those with significant assets may wish to transfer their primary home or a secondary home into a QPRT because homes within the trust will not count towards your taxable estate.  Accordingly, for high earners, a QPRT could help you to avoid state or federal estate taxes, which can be quite substantial. 
Even further, a QPRT can freeze the value of the residence at the time the trust is created.  This can result in significant tax savings.  A QPRT is also considered a grantor trust, allowing the grantor to claim an income tax deduction for any real estate taxes paid and a deduction for the value of the estate when initially transferred.  Aside from tax benefits, the QPRT allows you to continue to use the home as your personal residence if desired during your lifetime, but then allows the home to easily transfer to a spouse or another heir.

Creating a QPRT

Your QPRT will start with the creation of an irrevocable trust.  You will need to determine who will serve as the initial and successor trustees and how long you wish to retain the right to live in the property, referred to as the retained income period. Carefully consider each of these provisions because an irrevocable trust is generally a final act that cannot easily be amended. 
Once the trust is established, you will need to transfer ownership of your home to the trust.  Your attorney will perform this step for you by recording a new deed in the property records.  Your home will need to be appraised to establish its fair market value.  You will be able to deduct the value of the home from your federal taxes because it is considered a gift to your named beneficiaries.  Once your retained income period ends, ownership of the home will transfer to the beneficiaries, but you could pay rent to remain in the home if desired.

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