Effective estate planning means using the tools available to save significant cash by avoiding the heavy tax burden that often comes with transferring assets to beneficiaries. Homeowners often face a significant tax bill when transferring properties to heirs because their personal home is among the most expensive assets they own. This is where a Qualified Personal Residence Trust (QPRT) helps immensely.
What is a Qualified Personal Residence Trust (QPRT)?
A QPRT is a type of irrevocable trust designed to exclude your own personal home from your estate which, in turn, lessens the estate/gift tax burden when the home is ultimately transferred to your beneficiary on a specified date. These can also be used for secondary residences.
This puts ownership of the home into the trust but does not require you to vacate the property. You and your family continue benefiting from having the comfort and safety of your home while setting up a plan to transfer the home to your heirs.
How is the Gift Value of the Property Calculated?
It’s important to understand that the entire value of the home is not excluded from your estate. The resident retains a partial interest in the home which means retaining partial value in the estate.
To calculate this, you apply the applicable federal rates (AFRs) at the time the home is put into the QPRT. For example, if you own a home worth $800,000 and transfer it into the trust to be held for 10 years, you would only owe a gift tax on the $800,000. This applies even if the home’s value increases by another $200,000 over that 10-year period.
Term Matters with QPRT
If you pass away before the term of the QPRT expires, the home would be transferred back into your estate meaning the potential tax relief is completely eliminated. Choosing the right term for your QPRT is imperative.
Are you confident you are healthy enough to survive the length of the trust? You and your beneficiaries can’t afford to have you predecease the trust, so you need to make the right choice on the term. If the trust expires and you would still like to live in the home, you can enter into a lease agreement with whoever takes ownership of the home.
When is a QPRT Appropriate?
If you believe the value of the home will increase significantly and want to transfer ownership of the home to your children while you’re still alive, a QPRT is right for you. This allows you to avoid incurring a tax bill for the capital gain of the home’s increased value.
QPRTs are also beneficial for individuals who have a high-value estate and need to lower the value in order to avoid the taxes that come with it. You can reduce the estate tax incurred in passing your home to your chosen heirs while still ensuring you have a place to live during your lifetime.
Still unsure if you should use a Qualified Personal Residence Trust? At the Law Offices of Tyler Q. Dahl, we are consistently having these conversations with our clients and aiding them in making the right choices for their estate, their finances, and their beneficiaries. Let us help you make the right decision with your personal residence.
Dahl Law Group
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