What is a QPRT?

A Qualified Personal Residence Trust (QPRT) is a trust that helps in reducing taxes on a personal residence within a specified amount of time. The grantor transfers the residence to the QPRT, yet they may still continue to live there, and after a specific time, the residence either is reverted to their estate or gifted to their beneficiaries. QPRTs help to minimize gift taxes and estate taxes.

A grantor is only allowed to create QPRTs for not more than two residences. These residences may include the grantor’s principal residence or secondary residence (such as a vacation home) or fractional interest in both. The purpose of QPRTs is to reduce the taxable estate threshold by transferring personal residences to a trust that will not tax any increase in value. The tax authority can only tax estate tax, that is, the original value of the residence as at moving it into a QPRT. A QPRT is irrevocable, meaning its terms are immutable as per its establishment. This is why careful consideration of all factors is necessary before creating one.

A suitable example

Most financial law topics may belabor the point and submit more information than is necessary. Understanding Qualified Personal Residence Trusts may be very easy, but the current knowledge base uses excessive words. The best way to understand it is via an example.

Consider this: Roy and his wife Ray live in Missouri. Ray has a personal residence in Missouri valued at $500,000. They have a daughter, Kim. Roy and Ray are both 75 years old. Ray is apprehensive about the tax liability the property may incur, even though the property is mortgage-free.

Ray is considering using a QPRT. Here is what this means for her:

• She, and Roy, will continue to live on the property during the entirety of the QPRT. This period is known as the retained income period. Kim, her daughter, will be the QPRT’s beneficiary at the lapse of this period.
• Ray could select the term of the QPRT to be either 5, 10, or 15 years, depending on her projections. She could split her interests by having two QPRTs with different terms. No grantor is allowed by law to have more than two QPRTs running simultaneously.
• She could request a provision in the trust that will allow the home to return to her estate should she not survive the term.
• If she dies before the term limit, the residence is transferred back to her estate, and the executor will be liable for requisite taxes. The benefits of the QPRT will be lost and will practically be the same as if the grantor did not take up the QPRT in the first place.
• If she survives the QPRT’s term, the residence is transferred to Kim, and she can now rent the residence from Kim at a rent that is at Fair Market Value. Ray paying rent to Kim, her beneficiary, means that she is basically moving even more of her assets to Kim. Rent payments are not gifts.
• If she dies after the term’s limit, this has no impact on any decision concerning the QPRT because its obligation ends at the end of the term.
• In a standard QPRT agreement, neither Ray nor Kim can repurchase the residence from the QPRT. However, it allows for the residence to be sold to other parties.
• The caveats: For Ray’s peace of mind, she should consult with her Certified Public Accountant regarding the land surrounding the residence, appliances in the home (because the QPRT does not cover them), and other seemingly minor details that could become a headache if not adequately dealt with.

Non-Tax Considerations

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This hinges on family relationships and dynamics. QPRTs deal with personal property, which may be a massive bone of contention in the family. If the grantor survives the entirety of the term, they release the property to their beneficiaries, that is, their children, and are now required to pay rent during their stay. It may be awkward for some families to have a parent pay their kids rent.

Therefore, since QPRTs help reduce tax obligations, the aftermath of the QPRT’s purpose should be considered at length before deciding on it.

Final Thoughts: Important Life-Saving Tips

QPRTs are very sensitive and may rock family relationships a great deal, just like prenuptial agreements. First, it may be awkward to receive rent from your parents. Also, it seems like they are created as a way to predict the grantor’s death. If they do not die, one is left in a tough place; should they celebrate or mourn? Crude and cruel as it may seem, QPRTs retain their integrity and have been used for many years. However, to make this process smooth, here are some of the tips to consider before setting up QPRTs:

• Discuss with family and have everyone on board. It is an irrevocable trust; have everything in order first.
• Pay off all mortgage or debt obligations on the residence before moving it to the QPRT.
• The residence cannot be mortgaged while it remains in the QPRT.
• There will be legal and accounting charges to be met during preparing, maintaining, and closing the trust; prepare adequately for them.
• Instead of a singular QPRT, consider moving the fractional interests of the residence to various QPRTs with different terms.
• Family dynamics again; ensure the beneficiary is listed correctly and that they are comfortable with the entire process.