Qualified personal residence trusts (QPRT) are a unique type of grantor trust that have estate, gift, and income tax implications related to the ownership and valuation of a grantor’s primary residence (home). There can be significant tax savings for a taxpayer who expects to have a taxable estate by using QPRTs to pass the title of a residence where appreciation is likely.
What Is a QPRT?
A QPRT is a trust that is created by a taxpayer (grantor), governed by a trust agreement, and funded with either the transfer of a home or enough cash to purchase a home within three months. The trust agreement would state a time period in which the trust is intended to hold the title of the home. This term can be any number of years but should be a term in which there is a high likelihood that the grantor will survive. If the grantor dies during the trust term, the value of the home is includable in the grantor’s estate. The trust agreement also will state beneficiaries, usually the grantor’s children, or a trust for the benefit of the grantor’s descendants.
The grantor has the right to reside in the home until the term ends, at which point the trust terminates and the trust assets are distributed to the beneficiaries. If there is a lease provision in the original trust agreement, then the grantor can remain in the home and pay a fair market rent to the new owners. The IRS has ruled that there must be documentation to support that the rental payments are fair market value; otherwise, the grantor’s use of the home might constitute “economic benefit” and the home could be included in the grantor’s estate at death, undoing the effort of the QPRT planning.
Benefits
The gift to the trust is a taxable gift of the remainder interest of the home. There can be discounts for the retained interest (use of the home during the trust term) and reversionary interest (use of the home after the term ends) to reduce the taxable gift and, therefore, would use less of the lifetime exclusion. This could result in estate tax savings.
Being a grantor trust, the income and expenses of the home pass to the grantor. The property taxes and mortgage interest can be reported as itemized deductions on the grantor’s personal income tax return, thus providing potential income tax savings. While these deductions are not available to the grantor after the trust term ends, the rental payments to the beneficiary if the grantor remains in the home will be a further reduction to their taxable estate without any gifting requirement.
After a successful QPRT term, where all requirements have been met, the home is not includable in the grantor’s estate as it passes outright to the beneficiaries.
Requirements
Assets – The only assets allowed to be held in the trust are the home and some cash. The home must be the grantor’s primary residence. A QPRT can hold cash for up to three months (six months in some cases) only if the cash is used to pay the expenses, maintenance, or improvements of the home. The QPRT can be funded with cash to purchase the property that will be the grantor’s primary residence, but the purchase must be completed within three months of the transfer of cash.
Ownership and Occupancy – The grantor—and a spouse or dependents—must be able to claim the home as their primary residence for the entirety of the trust term. The beneficiaries of the trust can never occupy the home as this would be considered premature distributions of the remainder interest.
Distributions – Being a grantor trust, any income earned is effectively distributed to the grantor. Any excess cash also must be paid out to the grantor on a quarterly basis. The beneficiaries can never receive cash or use the property in any significant capacity.
When Should You Consider a QPRT?
A QPRT is most beneficial to taxpayers who expect to have a taxable estate. The reduced taxable gift uses less of the lifetime exclusion, therefore leaving more to be used for other assets at the time of death. If a taxpayer expects their estate to be below the lifetime exclusion and not subject to estate tax, the administration and maintenance of a QPRT may not be worth the effort.
If a taxpayer expects appreciation on the home before their death and already intends to pass this specific asset to a beneficiary rather than selling or gifting it in their lifetime, then a QPRT could be a good vehicle to lock in the value before appreciation occurs.
Forvis Mazars Is Here to Help!
There are many nuances and details that can affect the formation, duration, or termination of a QPRT that are beyond the scope of this article. Contact a Forvis Mazars Private Client professional to discuss more specifically how this type of trust could fit into your existing estate plan. Don’t have an estate plan yet? We can help!
This article is intended to be a brief overview without the introduction of any state or local tax implications. If you want to learn more, reach out to a professional at Forvis Mazars or submit the Contact Us form below.