How a Qualified Personal Residence Trust "QPRT" Can Save You Big Money
A qualified personal residence trust (also known as a “QPRT”) is an advanced estate planning technique that could save you big money. It works by removing the value of your home from your estate for estate tax purposes.
For example, if you own a home worth $1 million and transfer it into a QPRT, you have removed $1 million dollars from your estate for estate tax purposes. If the state estate tax rate at the time of your passing is 16%, you have saved $160,000 in state estate taxes. If your estate is subject to the federal estate tax at your passing, which is currently 40%, that is an estate tax savings of $400,000. The total savings for both state and federal estate tax savings would be $560,000 or 56% of the value of your home.
The first step in utilizing this advanced estate planning technique is the creation of an irrevocable trust; the QPRT. Once the trust is completed, a deed is prepared to transfer your home into it. An appraisal of your home must be done at the time of the transfer into the trust and a gift tax return must be filed with the Internal Revenue Service. This is necessary because the transfer of the home into the QPRT is deemed to be a gift to the ultimate beneficiaries of the trust (usually your children).
After a specified period of time (usually ten to fifteen years), the home is transferred from the QPRT to the ultimate beneficiaries of the trust (usually your kids). The longer the term, the higher the discount. However, if you pass away prior to the end of the term, the value of your home will be brought back into your estate for estate tax purposes.
Once the transfer is complete, you can continue to live in your home. However, you must pay fair-market rent to the current owners of the home (your kids). The rent paid can also further reduce the value of your estate.
The requirement to pay rent once the home is transferred to your children is one of the drawbacks of using a QPRT. However, the tax savings often outweigh the disadvantages.
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