Some estate planners explain a Qualified Personal Residence Trust or QPRT as an opportunity that cannot be missed by a person when it comes to estate planning. It is a complex estate planning technique. If you are into estate planning, it is time for you to learn about this concept shortly called QPRT.
What Is QPRT Anyways?
It is a special kind of irreversible trust that has been designed with a purpose. The purpose is to get rid of the value of your prime residence or a secondary property from your taxable estate. However, the thing to remember here is that creating it and transferring ownership of your property into the trust is not an easy thing. Also, once it is done, it is hard to undo as well.
QPRT is described by most estate planners in Florida as an effective property planning instrument. The reason is that it helps with bringing down the extent of the taxable estate for federal estate tax intentions. This happens because it permits the landlord to endure the occupancy and use of the estate for a particular term. But, it transfers the ultimate ownership of the estate to other people or the children of the taxpayer.
Understanding the Terms Involved:
If you own an estate, you can establish a Qualified Personal Residence Trust. You can do this by transferring the title of your property to the trust. As the owner of the property, you are called the grantor, and the trust instrument will provide you with the right to occupy and use the property. However, you can use it for the number of years as per the terms given in the instrument. On the completion of the agreed-upon terms, the trust will pass on the ownership to the remaining beneficiaries. These beneficiaries can mostly be your children.
Just in case you wish to continue the residency after the terms expired, you will have to pay a fair rent as per the market value. You will have to pay this rent to your beneficiaries or to the new owners of the property. However, on the completion of the term, the QPRT can continue to stay as an irreversible trust for the benefit of the beneficiaries. This would be a beneficial move as compared to distributing the property straightaway to the remaining beneficiaries like your grandchildren.
How Can Qualified Personal Residence Trust Be Beneficial?
The Qualified Personal Residence Trust can be beneficial in the following ways:
Creates a Legacy for Your Family:
The biggest advantage of a Qualified Personal Residence Trust is that it creates a legacy for your family. It will help you pass on your property to the heirs. In turn, it will encourage them to hold on to the property. As a result, your dream of holding on to the property with your family for generations will come true. Further, it will help with the continued use of the property. You can continue to spend your days on the property without paying any rent. Also, you can continue to take all the valid income tax deductions. You can enjoy them during the reserved period of income of the QPRT.
Save Money by Paying Less Tax:
One of the important reasons to consider Qualified Personal Residence Trust is that you can save money by paying less tax. Even in the case of income tax, you have the opportunity to reduce the interest paid on the mortgage of the property. The Internal Revenue Service considers the transfer of a property as a complete gift concerning estate and gift tax to the QPFT. Presently, the lifetime exemption application for gift taxes is $5 million for one person. In the case of a married couple, this exemption limit is $10 million. So, you need not have to worry about this tax as well when you opt for QPFT.
For federal income tax reasons, a qualified personal residence trust is regarded as a grantor-type trust. During the period you get the benefit from QPRT, the trust will be considered to be your altered ego as you are the grantor. This would be beneficial as you can use the exemption amount mentioned above when you sell the principal residence. But, according to the recent amendment by the IRS, it seeks to disqualify a qualified personal residence trust that sells the personal residence either to you, your spouse or to an entity that you control.
A Protection Against Appreciation:
Another crucial benefit you can get when converting your property to Qualified Personal Residence Trust is that it gets rid of the value of both your prime and consequent residences. Even it will get rid of all future appreciation as well from your taxable estate. This deduction will happen at cents on the dollar. As a property owner, you can use as little as $100,000 of your lifetime gift tax exemption to get rid of $500,000 assets from your taxable estate. You can do this with the assumption that the value of your property is $500,000. Of course, it relies on other factors as well. Examples include the retained income period selected for the QPRT, your age, and the rate of interest. It can be beneficial specifically if the value of the property increases considerably by the day of your final breath.
How About Disadvantages?
Of course, before choosing a qualified personal residence trust, you will be interested in knowing whether it carries any demerits. As estate planners, we feel that it is our responsibility to share the demerits of this option with you:
- When the period agreed upon in the QPRT ends, the property will reach your heirs. So, you will be at the risk of paying rent. You will have to pay rent as per the market value at that date if you wish to continue to live in the house.
- Also, when the retained income period ends, you will lose the benefits concerning property tax as well. For real estate tax purposes, the value of the property will be reassessed at the end of the period.
Yes, you are right. The benefits of Qualified Personal Residence Trust outweigh the demerits. We are here to guide you on this concept.