A qualified personal residence trust (QPRT) is an irrevocable trust that allows you to retain the value of your primary or secondary home out of your taxable estate. Creating a QPRT and transferring ownership of your house to it is a lengthy and irreversible process. QPRTs offer both benefits and drawbacks.
What is a QPRT, and how does it function?
The owner of a residence can transfer their ownership of the property into a QPRT for estate planning considerations. They'd earn a qualified term interest rate, often known as a "retained income period," in exchange. Because of their enthusiasm, they are allowed to remain in the house. If they continue to use the house, they will begin paying your heirs fair market rent at the end of this time. If the owner dies during the retained income period, the residence is not included in their taxable estate; however, if the person is still alive at the conclusion of the period, the residence transfers to the trust's beneficiaries.Benefits from QPRTs
Your family will remember QPRT for a long time. It will help you to pass your home on to your heirs in a way that encourages them to keep it for the long haul if you want it to stay in the family for generations. With a QPRT, the residence can be used indefinitely. The homeowner can continue to live there rent-free and receive any applicable income tax deductions during the QPRT's retained income term. The retained income period is the period during which the property's owner lives in it until it is transferred to a beneficiary. These trusts also come with a slew of other significant financial advantages.Appreciation's Antidote
A QPRT reduces your taxable estate by deducting the value of your primary or secondary residence, as well as any future appreciation, at a fraction of its original value. When interest rates, the homeowner's age, and the retained income period chosen for the QPRT are all considered, a homeowner might use as little as $100,000 of their lifetime gift. They used a $500,000 asset tax exemption to remove it from their taxable estate. This is This is especially advantageous if the house's value has improved significantly since the owner's death. In the future, exemptions may be reduced. A QPRT also safeguards against cutbacks in the unified credit, generally known as the joint lifetime gift tax and estate tax exemption. If your home is worth a lot of money, the $11.7 million lifetime exemption in 2021 will allow you to join a QPRT and avoid paying gift taxes. This is crucial because transferring your home to the trust is the same as gifting it to the trust, which may necessitate the payment of gift taxes. The combined credit of $11.70 million is shared between the federal gift and estate taxes. You'd have $6.7 million left over to contribute to your estate if you used $5 million of the credit to make lifetime contributions. You'll be able to lock in the value of your house for gift and estate tax purposes if the joint exemption is significantly reduced in the future. You won't have to stress about how much your home will appreciate or how large your estate tax exemption will be when you die. 4Even more ways to reduce your taxable estate
When the retained income period expires and you must begin paying fair market rent to your heirs in order to continue using the property, paying rent at the end will help to further reduce your taxable estate. While this may appear to be a disadvantage at first, it allows you to make larger contributions to your heirs without having to use your annual exclusion gifts or lifetime gift tax exemption.QPRTs and the Risks They Present
The QPRT transaction will be completely reversed if you die before the retained income period ends. As of the date of your death, the full fair market value of your home will be included in your taxable estate. Other potential drawbacks should be considered as well.It will be necessary for you to pay rent
When the term of retained income expires, ownership of the home passes to your heirs, and you no longer have the option to live there rent-free. If you wish to keep the house for a long time, you'll have to pay fair market rent to your heirs instead.It's possible that your property tax exemptions will be revoked
You may lose property tax benefits if the retained income period expires. The home will be assessed at its current fair market value for real estate tax purposes, and any property tax benefits associated with owning and occupying the property as your primary residence would be lost. In jurisdictions such as Florida, if one or more of the heirs do not make the home their permanent residence, the home may lose its homestead status for creditor protection and property tax purposes.Selling Your Home Could Be Difficult
You may encounter significant obstacles if your circumstances change and you want to sell your property after it has been taken over by the QPRT. If you do not wish to buy a new home, you must either invest the funds in a new property or take payments from the sale proceeds in the form of an annuity.Your Tax Basis Will Be Transferred to Your Heirs
With your income tax basis at the time the donation is made to the QPRT, the residence will be passed down to your heirs. If a successor sells the home after the retained income period has ended, capital gains taxes will be due on the difference between the home's value at the time of the gift and the sale price. This is why a QPRT is suitable for a family home that will be passed down through generations. The capital gains impact may be substantially smaller than the inheritance tax burden because the estate tax rate is 40% and the greatest capital gains rate is 20%. This material is not intended to be tax or legal advice, and it should not be used as such. Because state and federal laws are continuously changing, the information in this article may not reflect the most recent changes in the law. Please contact an accountant or an attorney for current tax or legal advice.