Likely, the most valuable and sentimental asset within your estate is your primary residence or a vacation home. If you desire to see your home’s legacy continue within the family after you are gone, but are concerned with high estate taxes, you may want to consider setting up a Qualified Personal Residence Trust, also known as a QPRT.
How a QPRT Works
A Qualified Personal Residence Trust allows you to remove a residence from your taxable estate and transfer the property to your desired beneficiary at a reduced gift value. But no need to start packing your bags right away! After the residence is transferred to the QPRT, you are still permitted to reside in the property for a set period. This time is known as the qualified term interest or retained income period.
Commonly, after the retained income period, you can continue living in the home if you pay fair market rent to the beneficiaries of your QPRT (often your children or trusts for your children).
How QPRTs Can Benefit You and Your Family
Transferring your home to a Qualified Personal Residence Trust is treated as a taxable gift of the home to your QPRT. The discounted rate of the gift is dependent on the length of the trust term, with longer terms resulting in more estate tax savings. QPRTs are also used to avoid probate for your family after your death.
QPRTs can be used for gifting both primary residences and secondary residences, such as vacation or beach homes. You are limited to creating QPRTs for two homes simultaneously.
The biggest reason to create a QPRT is to save on estate taxes. Statistically, the federal estate tax is not a concern for most families. 2017’s Tax Cut and Jobs Act increased the federal estate tax exemption to $11.7 million for individuals and $23.4 million for married couples. The federal estate tax rate is 40%. Depending on the political landscape in the United States at any given time, the federal estate tax exemption amount is subject to rise and fall. As of now, the Tax Cut and Jobs Act is set to expire in 2025 but may occur sooner under the new administration.
Some states also have a state estate tax. For example, in Maryland, the estate exemption is $5 million ($10 Million for married couples), and the estate tax rate is 16%. Any future appreciation of your property will be excluded from the overall value of your estate after your QPRT is established.
Before You Decide
Keep in mind, once you have transferred the property into a Qualified Personal Residence Trust, there is no turning back. QPRTs fall under the umbrella of irrevocable trusts, which means they cannot be adjusted or amended after they go into effect.
Creating a Qualified Personal Residence Trust requires confidence in your current financial situation, as well as a commitment to long-term planning. If you, as the grantor passes away during the retained income period, the property reverts back into the original estate at its current market value. Importantly, you are also relying on the ultimate beneficiaries to allow you to rent the residence back after the QPRT term ends.
To maximize gift tax exemptions, properties included in QPRTs should ideally have their mortgages already paid off. Under estate law, all mortgage payments on a property after the QPRT is established are additional gifts to the QPRT.
Per the stipulations of a QPRT, if a property is sold during the retained income period, a replacement property of equal value must be acquired within two years, or else the QPRT most often will be converted to a grantor retained annuity trust (GRAT).
Qualified Personal Residence Trusts require a lot of careful planning, as they include many smaller details to consider, which may not be financially attractive at this stage in your life. For the right families and the right time, however, QPRTs can provide security and peace of mind for your family’s future.
If you believe now is the right time to consider establishing a Qualified Personal Residence Trust, plan to meet with your qualified estates and trusts attorney who will walk you through the considerations.
At Sessa & Dorsey, we consider the bigger picture at hand and advise our clients on the best trusts for their specific needs and desires. If you have questions about estates and trusts, please contact us at (443) 589-5600.