Trusts and Real Estate, Part 2: What is a QPRT?

Piggybacking on my last post about transferring real estate into a living trust, let’s also look at a special type of irrevocable trust, the Qualified Personal Residence Trust or QPRT. QPRTs not only protect your assets in real property by moving them out of your taxable estate, they can also help you reduce your tax burden.

Here’s how it works: You, as the owner of a personal residence, transfer the title of your property into the QPRT but retain the right to live in your home for a set amount of years. During that time you will still be responsible for covering expenses such as property taxes and repair costs. At the end of the trust, the home passes to your beneficiaries without the IRS being able to levy an estate tax on it. Provided you pay your heirs rent at fair market value, you can keep inhabiting it.

The tax laws associated with QPRTs generally work to your advantage: First, you will avoid paying the estate tax on the value of your home, and second, by paying rent to your heirs after the trust has expired, you will effectively be passing on additional assets without estate taxes coming due. Yes, you will have to pay a gift tax at the time of deeding your home into the trust. But because you keep an interest in the property for a period of time, the IRS will deduct part of its value before calculating the tax. This makes it a better deal than the estate tax. How high will the gift tax burden be? I wish I could give you a fixed percentage, but it’s not that simple. The IRS uses complicated calculations to figure out how much you will owe. Your age, the length of the trust and the current interest rate all factor in, with higher interest rates and longer trust periods working in your favor.

The catch? You’ve probably guessed it: You could die before the trust ends. In this case, your home, valued at the time of your death, would become part of your estate again. Because of this risk, QPRTs work best for people who have a good chance of living another ten years or so. In the end, like much of life, QPRTs require weighing one advantage and one disadvantage against another. They are balancing acts. I’ll be happy to assist you.

by Kevin Moore

Kevin Moore, Founder of Kevin J. Moore & Associates, is focused in the areas of estate planning, trusts and probate services with additional expertise in both domestic and international business transactions and tax planning and tax controversy representation for individuals and companies.