If you own a home, you might want to consider using a personal residence trust as part of your estate plan. Qualified personal residence trusts (QPRTs) help reduce the size of homeowners’ estates and potentially lower gift taxes, as well as allowing tax deductions for real estate taxes.
How Does a QPRT Work?
A QPRT is a special kind of trust. The trust lasts for a set number of years and has beneficiaries who are usually family members of the homeowner. Once a lawyer sets up the trust by preparing a legal document, the homeowner transfers the home into trust by changing the deed or other ownership information. Doing so creates a taxable gift. However, this gift does not qualify for the annual gift tax exclusion because the beneficiaries only get the gift of a future interest in the property. Fortunately, though, making this gift also “freezes” the home’s value at its fair market value for that time.
By the terms of the trust, the original homeowner retains the use of the home rent-free during the set number of years specified. He or she must pay house-related expenses, such as taxes or repairs. To receive benefits from the QPRT structure, the homeowner must outlive the set number of years. Once those years go by, the trust ends and the beneficiaries receive the home. The homeowner can rent the home back from the beneficiaries to continue living there.
Because the fair market value was frozen back when the homeowner contributed the home to the trust, he or she may owe significantly lower gift taxes (and thus estate taxes) on the gift. In addition, he or she has reduced the total value of his or her estate – which also reduces estate tax liability.
Do You Need a QPRT?
People who may want to consider a qualified personal residence trust include:
- People with a potentially large estate or gift tax liability in the future
- Those who do not want to make large gifts during their lifetimes
- People who want to stay in their homes but help their family too
- Those who own homes in growing real estate markets
If you fall into one of these groups, you may need additional estate planning as well as a QPRT. For example, you may want to further decrease the size of your taxable estate by establishing more trusts in favor of family members. Talk to an estate planning attorney to learn more.
Planning your estate? 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.