Strategies & Techniques for Estate Planning


Qualified Personal Residence Trust (QPRT)

A Qualified Personal Residence Trust (“QPRT”) is an irrevocable trust created by an individual (donor). A QPRT is funded with the donor’s ownership interest in a personal residence. By using a QPRT, the donor can exclude the full value of the residence from the donor’s estate, and the residence will not be subject to estate tax.

The main advantage of the QPRT is that it provides an element of creditor protection. A complex trust can be created which can remove a home from an estate while the client continues to live in the home. This technique can provide considerable estate tax savings.

The main disadvantage of a QPRT is that a loss of estate tax savings will occur if the person fails to outlive the term of the trust.

There are techniques which can “hedge” against this uncertainty.

Planning Strategy
The donor transfers title to the donor’s primary residence or vacation home to a QPRT, retaining the right to continue to use the residence for a term of years. Provided the donor survives the term of years, the donor’s reserved right to use the residence terminates when the QPRT term terminates, and the residence will not be included in the donor’s estate for estate tax purposes.
At the termination of the QPRT term, the residence will be distributed to the donor’s children or to other beneficiaries chosen by the donor, or may remain in further trust for the benefit of those beneficiaries. The donor may agree with the beneficiaries or with the trustee to continue to use the residence, so long as the donor pays fair market rent for this use.

Tax Consequences
The transfer of the residence to the QPRT is a gift for tax purposes. However, the tax will be considerably smaller than the estate tax consequences had no QPRT been created. Provided the donor has not already fully utilized the applicable credit against estate and gift tax, no tax may be payable at the time the QPRT is created. Since the donor retains the right to occupy the residence until the end of the QPRT term, at the time the QPRT is created the only gift made by the donor is a gift to the remainder beneficiaries of the future right to the residence at the end of the QPRT term. This deferral reduces the value of the gift considerably depending on the duration of the QPRT term selected and prevailing interest rates. In addition, all appreciation in the residence’s value after the transfer to the QPRT will escape estate and gift tax.
For example, a $1 million residence transferred to a QPRT, retaining the right to use the residence for a seven-year term, will amount to about a $500,000 gift. Provided the donor survives the seven-years, the residence will not be included in his estate, nor will any of the appreciation in value of the residence occurring after the initial transfer.
If the donor dies during the term, the residence will be brought back into the donor’s estate for estate tax purposes. However, since the estate will receive full credit for any tax consequences of the initial gift to the QPRT, the donor is no worse off than if no QPRT had been created.

Other Considerations
Since a QPRT is a “grantor” trust, during the term the donor remains entitled to any income tax attributes of the residence, such as real estate tax deductions and other income tax advantages associated with home ownership.