What is a Qualified Personal Residence Trust (QPRT)?
A qualified personal residence trust (also known as as a QPRT - pronounced Q-Pert), is a helpful way to remove an asset from your estate at a discounted value. In other words, you could theoretically transfer a $1 million property to the trust, but only use a fraction of that value for gift tax purposes (e.g., only $400,000) would be subtracted from your lifetime exemption. This, in effect, would have saved $600,000 from estate taxes upon your death.
But it gets even better because the future appreciation on that asset would also be free of estate tax. Put differently, if you put a $1 million property in the trust, and 20 years pass and now the property is worth $2 million, then that additional $1 million in appreciation would also avoid your estate tax.
That sounds great - what’s the catch?
Here’s the catch:
Must be a personal residence (e.g., primary home or vacation home)
The trust must be irrevocable
The value of the gift tax discount will depend on the applicable federal interest rate (the 7520 rate) - so this strategy is more effective in a higher interest rate environment as opposed to a lower interest rate environment
If you die during the term of the QPRT, then the entire value reverts back to your estate (but you also would receive the gift tax exemption back so the only thing you really lose in that scenario is the administrative fees associated with setting up the trust)
After the QPRT terms ends, you need to figure out how you will be able to continue to use the property (if at all) at that point in time - since you technically no longer own the property and no longer have a retained interest in it via the trust
The property will not receive a stepped up cost basis upon your death (in other words, you avoided the estate tax on a large proportion of your wealth, but that property will carry a capital gain that will be taxed if/when sold by the remainder beneficiaries - the good news is that historically the capital gains tax is generally much lower than the estate tax so your family would likely still be better off overall from a tax perspective)
For all of these reasons, I generally don’t recommend doing a QPRT unless you have what I call a “family legacy property” that you do not anticipate your children ever selling or at least not for a long long time. For example, I personally think this strategy makes more sense for a lake house or beach house type of property, rather than one in the suburbs that your family will likely want to sell after you’re gone.
Either way, you’ll need to speak with your CPA and attorney to run the numbers and see whether the benefits outweigh the risks given your family’s situation and goals.
If you’d like to learn more about QPRTs, or if you’d like me to review or create a trust for you - click the link below to schedule a call with me today.
