Acronym: QPRT
How a QPRT Works
Suppose you want your son to inherit your house, but you’re not ready to move out just yet. In order to reduce the impact that holding on to the house will have on your taxable estate, you can set up a qualified personal residence trust for 10 years. Suppose the house is worth $400,000 at the time you set up the trust. Ten years from now, it may be worth $550,000. That $150,000 increase in value will happen tax-free, because the house is worth $400,000 in your trust. After 10 years, the house will pass to your son, and you will only be responsible for gift tax on the original $400,000 value.
How to Get a QPRT
There are several steps involved in establishing a qualified personal residence trust.
Write the Irrevocable Trust Agreement
The first step in establishing a QPRT is writing the irrevocable trust agreement. You’ll need to decide who will serve as the initial and successor trustees, how long you want to retain the right to live in the residence (this is called the “retained income period”) before it passes to your ultimate beneficiaries, and then who will be the ultimate beneficiaries of the trust when the retained income period ends.
Fund the Trust With Your Residence
You’ll then need to transfer ownership of your residence into the name of the QPRT. This is done by recording a new deed from your name into the name of the trust in the land records where the property is located.
Obtain an Appraisal of Your Residence for Gift Tax Purposes
As part of the transfer, you’ll also need to obtain an appraisal of the residence as of the date you transfer it into the name of the QPRT from a licensed real estate appraiser. This is necessary to establish the fair market value of the property for gift tax purposes.
Report Your Gift to the IRS
The next step is to file a Form 709, United States Gift (and Generation-Skipping Transfer Tax) Return, with the IRS, which will be due on Tax Day (usually April 15) of the year after you transfer the residence into the QPRT. The transfer of the residence into the QPRT is deemed to be a gift to the ultimate beneficiaries of the trust for federal gift tax purposes. If you live in a state that also has a state gift tax, then you’ll also need to file a state gift tax return.
After You Set Up Your QRPT
During the retained income period of the QPRT, you’ll go about your business as usual. You’ll be able to continue to live in the residence rent-free and take all appropriate income tax deductions. You’ll also be required to maintain and repair the property for the benefit of the ultimate beneficiaries of the QPRT.
Transfer Ownership to Your Ultimate Beneficiaries
When the retained income period ends, the trustee of the QPRT must transfer ownership of the residence from the name of the trust into the names of your ultimate trust beneficiaries. This is done by recording a new deed from the name of the trust into the names of the trust beneficiaries in the land records where the property is located. Once the retained income period ends, you’ll need to pay fair market rent if you want to continue to live in the residence full-time or if you want to use it periodically, such as for vacations. Payment of rent will help to further reduce the value of your taxable estate and pass more of your assets on to your ultimate beneficiaries without using any more of your gift tax exclusion, since the rent payments won’t be considered gifts to your beneficiaries.
