A Qualified Personal Residence Trust (QPRT) is an irrevocable trust in which you as the grantor place your personal residence into a trust, while retaining the right to live in the residence for a specified term, typically twenty (20) years. If you survive the trust term, the trust terminates and the principal of the trust (the home) passes to the beneficiaries designated in the trust, removing the residence from your estate.
Upon creation of the trust, you will have made a taxable gift of the remainder interest in the residence to the beneficiaries of the trust. Increasing the term of the trust reduces the amount of the initial taxable gift because the value of the remainder interest is less. Although a longer trust term reduces the initial taxable gift, it increases the chance that you as the grantor will fail to survive the term. If you fail to survive the term of the trust, the residence will revert to your estate at its then fair market value, subjecting the asset to estate taxation. This strategy works best when the interest rates are high.
How is a Qualified Personal Residence Trust Operated?
You, as Trustmaker, will have unlimited use of the residence during the term of the trust. You have the right to occupy the property, have guests on the property, and sell and purchase a substitute property. You will also be responsible for paying all expenses relating to the property. If you intend to continue residing in the residence after the trust expires, a fair market rent will have to be paid to the remainder beneficiaries of the trust.
When does the Qualified Personal Residence Trust Terminate?
If the trust term expires during your lifetime, the residence will pass from the trust to the remainder beneficiaries of the trust. If you fail to survive the term of the trust, the trust will end, and the residence will be includable in your estate.
What are the Tax Consequences of a Qualified Personal Residence Trust?
The benefit of the QPRT is the potential estate tax savings by removing the residence from your estate. The transfer of the residence to the trust is subject to gift tax, which will utilize a portion of your lifetime gifting exemption. A gift tax return will likely need to be filed upon the transfer of the residence to the QPRT. However, the taxable gift will be significantly less than the value of the residence, since the gift is of a remainder interest in the residence, and is based on your age and the terms of the trust. The full value of the residence is excluded from estate tax if you survive the term of the trust.