A Qualified Personal Residence Trust (“QPRT”) is a low-risk and potentially very high reward technique of transferring a primary residence to your beneficiaries at a low value for gift and estate tax purposes.
The strategy tends not to be as prevalent when interest rates are low due because it results in higher valuations for gift tax purposes. However, even considering our current low-interest-rate environment, now can be an excellent time for a QPRT.
QPRT Basics
A QPRT typically involves the grantor transferring their primary home or vacation home to an irrevocable trust. A QPRT is broken down into two separate interests:
1) the initial QPRT term in which the grantor retains the right to use and occupy the home rent-free for a specified term; and
2) the remainder interest in which after the QPRT term expiration and generally provides that the residence passes to a different trust for the donor’s spouse or a trust for the grantor’s children.
How to Set Up a QPRT
- Review and discuss with CPA and estate attorney
Deciding to set up a QPRT is an important estate planning decision. Make sure you consult with all parties to make sure it is a good fit in your situation.
- Establish the trust
The actual trust document needs to be drafted, reviewed and signed. The estate attorney will draft the document based on the specifics of your circumstances and state law.
- Calculate the gift value
Once the term is established, the IRS approved discount rate is applied to the fair market value of the home to determine the appropriate gift value. This is the value that will be used when filing the gift tax return.
- Transfer the home to the trust
Legal title of the home needs to be transferred to the trust. The attorney will draft the related deeds and make sure they are timely recorded.
- File gift tax return
At the end of the year, the gift tax return must be filed to report the taxable gift. This is normally completed by a CPA with experience filing gift tax returns. Most CPAs just don’t understand gift tax filing requirements.
As you can see, there are many steps involved in setting up a QPRT. These trusts can be complex so the more questions you ask the better off you are. Just follow the compliance steps above and your trust will be up and running in no time!
