A Qualified Personal Residential Trust or QPRT (pronounced CUE-pert) is a trust whose only asset is a residence. The QPRT removes the value of a home from the estate and shelters appreciation. It also provides asset protection associated with irrevocable trusts.
The homeowner transfers the home into a QPRT, continuing to live there throughout the term, which could be for any period he selects. At the end of the term, ownership of the home passes from the trust to the children.
A wealthy donor who gives her residence to her children must file a gift tax return and is subject to a gift tax if she has used up her gift tax exemption. If the home is worth a million dollars, her tax liability is $350,000. If instead of a life-time gift, Ethel waits to transfer the house at death, when it has appreciated to, say, $1.8 million, her estate tax liability will be $630,000 (assuming the rate remains constant).
If she transfers her home to a QPRT, the result is more favorable: She’s made a smaller gift (the remainder value) to the children and removed the present value and future appreciation of the home from her estate. Assuming four percent annual appreciation and a 15-year term, the potential death tax savings to Ethel’s estate is $454,000.
To obtain these tax advantages the donor must survive the QPRT term. If the donor dies before the end of the term, the trust assets will be includible in the estate. Thus, with donors of advanced age, it’s prudent to make the retained interest period shorter. But you’re never too old for a QPRT. If the donor in the above example were, say, 94, even a three year QPRT would generate tax savings to her estate of $241,281.
At the end of the term, the donor must either move out of the residence or pay fair market rent to the children. Some property owners dislike this feature.
If the donor stops living in the home before the end of the term, there is a cessation of use. Instead of terminating, however, the trust instrument may require converting the trust into a qualified annuity trust (a GRAT).
Being an irrevocable trust, a QPRT shields the home from the donors’ creditors. Under this structure, the home is not owned by the debtor; it is owned by a separate legal entity, the irrevocable residence trust.
Some additional QPRT features:
¢ The home must be the grantor’s residence for at least 14 days a year;
¢ Condos, mobile homes, boat homes and duplexes qualify; triplexes and apartment buildings do not;
¢ A grantor may have no more than two residences in QPRTS;
¢ The transfer does not cause reassessment; and
¢ The bank can’t accelerate the loan on the transferred residence.
Summary
QPRTs reduce taxes and protect one of your critical assets, your home. QPRTs are underused probably because most people have never heard of them, which is a shame. Everyone who owns a home has this technique open to them. QPRTs will likely become more widespread in 2013 when the personal exemption for federal gift and estate taxes falls to $1 million.
They’re approved, conservative vehicles under IRS regulations. In fact, my QPRT trust instrument contains provisions taken directly from the regulations. As a colleague jokingly says, QPRTs are like legalized stealing.
Edgar Saenz is a Los Angeles-based estate planning attorney. He is a graduate of Stanford Law School. He is a member of the Trust and Estates sections of the State Bar of California and the Los Angeles County Bar Association and serves on the board of the Culver Marina Bar Association. Telephone: (310) 753-1668; email contact: [email protected].