Many people who learn about the estate tax underestimate the value of their home. They think that the estate tax exemption will exceed the value of their entire estate and as a result do only minimal estate planning. In today’s real estate market, homes appreciate in value dramatically based on factors such as location and housing shortages. Because your home may be worth more than you think, consider whether to place it in a Qualified Personal Residence Trust.
A Qualified Personal Residence Trust (QPRT) is a special kind of trust recognized by the IRS. Placing a home or vacation home in a QPRT will (with a few exceptions) remove it from your estate for estate tax purposes. If your home’s value skyrockets before you pass away, your estate could save hundreds of thousands of dollars in estate taxes because the home will not cause your estate to exceed the exemption amount.
QPRTs last for a specific number of years listed in the trust documents. While the years pass, the person who owned the home and put it in trust has the exclusive right to live in the house rent-free. He or she pays taxes, insurance, and repair costs. After the years pass, the beneficiaries become the owners of the residence that was placed in trust. Usually the beneficiaries are children or close relatives. The beneficiaries can lease the home back to the original owner to allow the owner to continue living in the house. However, you cannot repurchase the home from the beneficiaries.
If the owner dies before the years pass, then his or her estate will pay taxes on the QPRT (which includes the home’s value). To avoid this result, people interested in creating Qualified Personal Residence Trusts should ensure that the number of years listed in the trust document is less than their life expectancy. An alternative is to create multiple QPRTs listing different numbers of years containing fractional interests in your home. You must live longer than the trust’s term to remove the home from your estate for tax purposes.
For people with valuable homes or vacation properties, QPRTs can be a great option for reducing potential estate tax liability while continuing to live at home. As with all estate planning methods, you should talk to a lawyer about the pros and cons of using a QPRT. One factor to consider may be federal interest rates, which affect estate tax savings. You will need to look at the value of the rest of your estate as well.
Are you interested in setting up a Qualified Personal Residence Trust? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.