QPRT: Qualified Personal Residence Trust
It is possible to place your house in a trust, continue to live in it and save big money on estate and gift taxes. It is not too good to be true, just good enough to be true. If you have a cohesive family and you plan to leave your house to those family members, you should definitely investigate this technique.
This was enacted by the legislation of Congress for tax reduction and stands as one of the many options for estate planning today. That is as long as the legislation for tax reduction stands. As with all legislation, it could be gone tomorrow. QPRTs are “tricky” because much of their success relies on timing and prediction.
- A QPRT is removing the residence from the donor's estate at a reduced transfer tax and placing it into a trust for a specific period of time. It is especially beneficial if the residence is expected to appreciate over time.
You deed your house to a type of trust known as a Qualified Personal Residence Trust or a QPRT . You preserve the right to live in the house for a certain, specified term or a certain number of years. At the end of this provision, the house passes to your children or another named beneficiary. This is a great reduction of federal or state taxes and gift taxes with certain limits. If you do not survive the term (due to death), then the house will be returned to the estate as if it were never part of the trust in the first place and therefore will be subject to estate taxes.
The QPRT affects an estate tax freeze, a discounted gift tax value, and permits the donor to live in the house just as before. When the donor dies, the house passes to the beneficiaries at fair market value with the old income tax basis, thus avoiding major taxes.
If you notice the word “donor” instead of the plural “donors”, delving into the details and rules of a QPRT it is possible to create two QPRTs, one for each spouse. Remembering that a QPRT is only viable when the donor survives the term, which would mean that half of the benefits would be transferred into each QPRT and then the same rules apply.
If the donor survives the term, he or she can occupy the house at fair market value for the rent share. Be aware that this rent payment is subject to capital gains, therefore potentially canceling out some of the savings.
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