Qualified Personal Residence Trust (“QPRT”)
A Qualified Personal Residence Trust places a grantor’s primary or secondary residence in a trust either for beneficiaries of the grantor’s choosing. The trust could benefit any designated beneficiary, including but not limited to a spouse, children, grandchildren or any heirs, or for a foundation, religious organization, or charity.
A Qualified Personal Residence Trust—or a QPRT for short—is often chosen because of its ability to reduce federal estate tax associated with transfers of real property to beneficiaries. In addition, a QPRT can reduce federal gift tax that is a part of making those types of transfers. Finally, people often choose to execute a QPRT because it provides unparalleled asset protection.
A Qualified Personal Residence Trust allows a grantor to effectively remove the value of a primary or secondary residence from the grantor’s estate at a reduced gift tax value.
What does this removal of value allow for? If the value of a primary or secondary residence is removed from the grantor’s estate, that act will dramatically impact the net total of the taxable estate for estate tax purposes.
An interesting bit of history around QPRT’s, Qualified Personal Residence Trusts were created to assist Americans during the economic downturn of 1990. At the time, the public were rightfully concerned about the economic climate’s impact on those who were inheriting property. Ever increasing numbers of people who inherited property were forced to sell the property because they couldn’t afford to pay the taxes when ownership was transferred to them. The solution? Congress passed the Qualified Personal Residence Trust so grantors can apply to a primary or secondary residence and can significantly decrease taxes at the time that the residence is inherited.
When you choose to execute a QPRT you set up a trust as you typically would, then you transfer title of your home into the name of your trust. Once you’ve completed that step, you are deemed to have made a gift to the ultimate beneficiaries of the QPRT for gift tax purposes.
At the point at which designate when executing the trust, or at the time you pass away, the ownership of your home is transferred over to the final beneficiaries you’ve named in the QPRT. That being the case, you no longer hold any ownership rights in the property. Why is that a good thing? Well, for starters, the IRS can’t assess an estate tax against something that you no longer own, so you’ve effectively cut way back on the taxes you’ll owe.
The Qualified Personal Residence Trust has specific guidelines, which make trying to execute one on your own unwise. Please seek the assistance of a qualified estate-planning lawyer.
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