Insights

Safeguarding Real Estate Through a Qualified Personal Residence Trust (QPRT)

04.25.24

Navigating the world of estate planning can be intricate and demanding, particularly for high net worth individuals looking to create a financial legacy while taking advantage of current gift tax exemptions made available by The Tax Cuts and Jobs Act of 2017. In 2024, the federal estate and gift tax exemption stands at $13.61M per individual – but the Act is set to expire on December 31, 2025, and these exemption amounts may disappear.

One strategic option is to transfer certain real estate into trust by creating a Qualified Personal Residence Trust (QPRT) – which can not only pave the way for significant tax savings but can also provide asset protection.

What is a Qualified Personal Residence Trust (QPRT)?

A Qualified Personal Residence Trust (QPRT) is a specialized type of irrevocable trust designed to decrease the amount of gift and estate taxes typically due when transferring assets to beneficiaries.

In essence, a QPRT allows you (the “grantor”) to transfer ownership of your residence into a trust while retaining the right to live in the home for a specified period of time. The goal is to pass down your high-value real estate assets in a tax-efficient manner.

The property reverts to the remainder beneficiaries after the expiration of the QPRT term. However, the grantor may continue living in the house by leasing the property back from the remainder beneficiaries at fair market rent, which can further reduce the value of the grantor’s taxable estate.

Benefits of a QPRT

  • Probate Avoidance. Real property gifted to a QPRT is not subject to probate on the death of the grantor. A trustee or successor trustee has continuous and immediate access to the QPRT and can immediately transfer the subject property to the designated beneficiaries.
  • Use of Gift Tax Exemption. The amount gifted to beneficiaries in a QPRT falls under the grantor’s lifetime federal gift tax exemption, helping to ensure that the current gift tax exemption amount does not go to waste.
  • Leveraged Gifting. The value of the gift for tax purposes is the fair market value of the property minus the present value of the beneficiaries’ right to receive the property at the end of the term of the QPRT. The “reduced” value of the gift allows the grantor to further leverage the current lifetime federal gift tax exemption by shifting wealth at a discounted valuation for tax purposes.
  • Estate Tax Reduction: The gift tax value is calculated at the time of the transfer, and all future appreciation will escape the grantor’s taxable estate. In addition, a grantor can still claim real estate taxes and other associated deductions on their tax return.
  • Flexibility: A grantor may sell real property that has been gifted to a QPRT without losing all the tax benefits. To accomplish this, proceeds from the sale must be reinvested in a new real property that will now be subject to the original QPRT.
  • Low Risk: If the grantor does not outlive the QPRT term, the value of the QPRT will be included in the grantor’s estate and subject to estate taxes. However, the grantor’s estate will receive credit for the initial gift to the QPRT and is no worse off than if the QPRT had not been created.

Qualifying Assets for a QPRT

You may have up to two QPRTs at any one time. For example, your main home can be placed into a QPRT, allowing you to continue residing there while transitioning it to your heirs. In addition, your secondary or vacation home may also qualify for a QPRT, providing an additional pathway to transfer your high-value assets.

Setting up a QPRT

  • Initial Transfer of the Residence: The residence must be formally transferred into the trust to initiate a QPRT.
  • Determining the Retained Interest Period: You must decide the length of time you will retain the right to live in the home, a term that can significantly affect the trust’s taxation and benefits.

Additional Considerations

You no longer own the house. Once your trust term ends, you legally lose access. However, you can rent the residence from your beneficiary at fair market value, which would help transfer additional assets to your heirs without affecting your annual gift exclusion. You must survive the trust term for it to be legally binding. If not, the property is returned to the taxable estate.

Tax Implications. While a QPRT can offer tax benefits, it’s imperative to consult with a tax advisor to understand the full range of implications. Depending on where you live, transferring your property to a QPRT could nullify any state and local property tax exemptions, and would leave you responsible for potentially higher property taxes during the trust’s term.

Sale of the Residence. Selling the residence during the retained interest period can have complex consequences, and careful planning before any sale is essential. Also to note, If the beneficiary sells the home after the trust term ends, any gains will be calculated using the home’s fair market value at the time of the trust’s creation.

Safeguarding your wealth and ensuring a seamless transition to future generations remains one of the key elements to estate planning, and a QPRT can be an invaluable piece of that complex puzzle. Tailoring your approach to estate planning with the guidance of a MAI financial advisor will help to ensure your assets are protected and your legacy preserved. As with any sophisticated financial maneuver, MAI is here to help. Reach out today.

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Information updated as of March 26, 2024. This is for educational purposes only.  The opinions and analyses expressed herein are subject to change at any time. Any suggestions contained herein are general, and do not take into account an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Distribution hereof does not constitute legal, tax, accounting, investment, or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein. In accordance with certain Treasury Regulations, we inform you that any federal tax conclusions set forth in this communication, were not intended or written to be used, and cannot be used by any taxpayer, for the purposes of avoiding penalties that may be imposed by the Internal Revenue Service.

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