Qualified Personal Residence Trusts, or QPRT’s, are another kind of irrevocable trust used to protect your real property. At the conclusion of a QPRT term, you gift your property to the trust beneficiaries. Because property ownership transfers upon the end of the trust term, if you want to remain living at the property, you will execute a lease agreement between yourself and the beneficiaries. Overall, QPRT’s are a way to save on estate taxes because your residence never formally becomes part of your estate.
Different than a life estate, in order to achieve QPRT tax exemptions, you must live past the trust term. In other words, if you predecease the trust term, your property will be transferred back to you, entering into your estate and ultimately subject to any and all estate and gift taxes. Although this can intimidate some, people often bypass this issue by making the trust term shorter. However, if you die before the commencement of the trust term, taxes will be based off of the property value at the time of your death.
Because your property transfers to your beneficiaries before you die, QPRT’s are known for creating significant tax breaks. Not only does your property avoid estate taxes, but it also “pauses” property taxes at the time of transfer. Imagine this: November 1, 2023 is the expiration of your QPRT and your property is valued at $500,000. On that date, your property transfers to your beneficiaries, meaning you enter into a lease agreement with said beneficiaries so that you can live in your home until you pass. November 1, 2033, you pass, leaving your beneficiaries with property they intend to sell, with an updated property value of $1,000,000. Due to you putting the property in a QPRT in 2023, the property taxes are based on the 2023 property value of $500,000, saving you a significant amount of money. Despite the estate and property tax break, it is important to note that, upon transfer to the beneficiaries, the property is subject to a transfer tax.
Another nuisance in forming a QPRT is that, upon the completion of the trust term, in order to continue residing at the property, you must enter into a lease agreement with the beneficiaries of the QPRT. Unlike a life estate, the property ownership will be transferred to the trust’s beneficiaries before you die. This means that when the term of the trust runs, you will no longer own your property, but, as long as you wish to live there, will have to lease it from whomever is the current property owner. This is one of the many reasons it is essential to make well thought out decisions when electing who will benefit the trust.
Although this blog highlights some of the finer points of qualified personal residence trusts, it is imperative to keep in mind that there are many other IRS-specific qualifications that must be met. To see if a QPRT is the right fit for your estate plan, schedule a consultation with one of our attorneys at 251-621-1555.