A Qualified Personal Residence Trust (QPRT) allows you to remove a personal residence from your estate at a reduced gift tax value, save estate taxes, and still enjoy use of the property.
A QPRT is an irrevocable trust whereby a grantor can transfer a personal residence to heirs during his or her lifetime at a reduced gift tax value while still enjoying use of the property.
The grantor transfers the property into an irrevocable trust specifying the number of years the grantor retains the right to use the property. The grantor also specifies the person(s) who receive the property once the term ends (the remaindersperson or remainderpersons). Gift taxes are due at the time of the gift to the QPRT, but because the remainderperson(s) do not receive the property until some time in the future, the value of the gift is reduced for gift tax purposes.
The longer the retained interest of the grantor, the larger the gift value discount will be. However, if the grantor dies during the retained interest period, the full value of the house is brought back into the estate for estate tax purposes thus nullifying any tax benefit. So the tax benefit of a long retained interest period has to be balanced against the increased chance of dying during the period.
If the grantor outlives the retained interest period, he/she can still use the property by paying fair market rent to the remainderperson(s). This is an excellent way for a wealthy parent to transfer even more money to the children free of gift and estate taxes.
- Gift Tax Savings – Residential assets are transferred to heirs at a discounted value
- Estate Tax Savings – The residence and any future appreciation is removed from estate
- Grantor continues to use the residence
Greg Grantor, age 60, transfers his $1 million family vacation home to a QPRT, sets his retained interest term as 15 years, and names his only child, Gretta, as remainder person. Because Gretta must wait 15 years to receive the house, the value of the gift for tax purposes might be reduced from $1 million to $295,000 using government discount rates. (The actual discount would vary, depending on currently published rates.) Greg is able to save much more of his unified credit exemption than if he gifted the house outright – and he still enjoys use of the house.
Compare this technique to:
- Outright Gift: Gift value for gift tax purposes would be $1 million, thus Greg would use much more of his unified credit and would lose immediate use of the house.
Bequest At Death: Value of house could rise to $2 million or more by time of death thus increasing his estate and his potential estate taxes. If the residence is expected to appreciate significantly the potential transfer tax savings of a QPRT could be enormous.