Among the leading legal tools for passing wealth down through generations is the QPRT. A qualified personal residence trust, or QPRT (“Q-pert”) is a form of irrevocable trust to pass a home to beneficiaries.
The QPRT effects an immediate conveyance of the house to the trust. Nevertheless, the homeowner who establishes the trust (called the grantor) continues to pay all related taxes, and continues to receive any associated tax deductions, for a specified time. Indeed, the grantor may live in the home rent-free, based on what’s termed a qualified term interest,until the specified time when the house transfers to its beneficiary.
Your home might be modest, yet it could still be subject to federal or state estate tax together with the rest of your assets when you pass on. This is especially so when government administrations set lower thresholds for the minimum amount of a taxable estate.
One QPRT, Multiple Channels for Transferring Wealth
The QPRT relieves a homeowner’s taxable estate of the home’s value and appreciation while lowering the grantor’s taxes — leaving more value for the next generation. A smaller estate tax bill, for those with large, taxable estates, means more money goes to beneficiaries — typically the homeowner’s children. This matters greatly, because estate taxes, for those required to pay them, run about 40%.
So, let’s break down these key advantages of the QPRT:
- The QPRT averts estate taxes. The home leaves the owner’s personal estate and goes into the trust. Once the house is out of the grantor’s estate, it’s no longer an item for estate tax if the grantor outlives the trust.
- The QPRT hedges against appreciation. According to the case Pergament v. Joseph Yerushalmi, 487 B.R. 98 (Bankr. E.D.N.Y. 2012), a QPRT can “freeze” the home value for estate tax purposes. When the trust is created, the home’s taxable value is set.
- The QPRT reduces gift taxes. Transferring a home into a QPRT does not constitute making a gift of a present interest. A gift has to be immediate for gift tax purposes. Here, the owner isn’t physically parting with the home until the term ends.
- The QPRT may serve as asset protection. In Yerushalmi, the New York bankruptcy court held that a QPRT is a valid asset protection instrument if was established before its grantor’s debt matter, and not fraudulently created to escape a creditor.
When the Clock Strikes Midnight
When the trust’s specified term of years is up, assuming the grantor is still living, the home title is transferred to the trust’s beneficiaries. The home must be deeded to them directly, or placed in a trust for them. This means a grantor has arrived at the goal of the trust.
The grantor, who no longer maintains the house and pays its insurance and taxes, now stops receiving its property tax benefits.
A grantor who stayed in the house throughout the QPRT term has two options:
- Move out. This prospect is one reason we find more discussion of QPRTs for vacation homes than for primary homes.
- Stay put. This is another valid option. The grantor who stays must immediately pay rent at fair market value to the new owners — the trust beneficiaries. The grantor might consider this new payment stream an additional channel for transferring wealth to the beneficiaries.
Pro tip: During the time the home is in the QPRT, the grantor, as steward of the property’s value, should make basic repairs. But a capital improvement is considered a taxable gift to the trust.
Live Long and Prosper With a QPRT
We wish every QPRT grantor a long and healthy life, and the joy of seeing the trust reach the end of its term, and the deed pass to its next owner. In the case that a grantor does not live long enough to hear the QPRT clock strike midnight, the trust’s core tax-reduction purpose won’t come to fruition.
Instead, the market value of the house will be counted, as of the date of death, as part of the grantor’s estate.
In the right circumstances, this is not a major setback. Yes, the grantor is out the time, the opportunity costs, and the legal costs that went into creating the QPRT. And yes, the grantor has paid for accounting and professional fees to start the QPRT and keep it running. But apart from these losses, the asset simply goes back into the homeowner’s estate, where it was at the beginning.
Moreover, as explained below in the Checklist: What to Ask Your Adviser section, you can set a schedule for fractional shares of the asset to go to your beneficiaries. If you do, you elevate the chances that at least part of the home’s value will receive the intended benefits.
The Basics of Selling a House From a QPRT
Need to sell the house from the trust? If so…
- Have the buyer make the purchase funds payable to the trust’s name, and put the sale proceeds into a new house, purchased by the trust. As long as the funds do not leave the trust, the QPRT benefits remain intact.
- Another option is to set up the trust so the sale proceeds can be drawn as a grantor-retained annuity trust (GRAT annuity) from the trust. The Journal of Accountancy explains this option more fully.
Are you a QPRT beneficiary? After the qualified term interest winds up and you receive the house, you might opt to sell. You received it with the deceased grantor’s “frozen” tax basis — the cost basis the home had when it entered the trust. If you sell, your taxable capital gains will be calculated on the appreciation not from the date of death, but from back when it entered the trust, until your sale date.
Note:Once the title passes to its beneficiaries, the home is then reassessed and has a new fair market value.
Checklist: What to Ask Your Adviser
Forming and tending a QPRT is complicated. It involves working with professionals in your state who have estate planning knowledge. The first task is to determine whether the QPRT is a better fit for you than other kinds of trusts or estate planning tools.
☛ Learn more about Estate Planning for Your Real Estate Holdings from Deeds.com.
Here is a checklist of QPRT questions to present to your CPA and your estate planning attorney:
- Does my state allow meaningful homestead exemptions and protections that will end when the beneficiaries receive the home?
- Will the beneficiaries need to live in the home to keep my current homestead benefits?
- How long should the term of the QRPT be? Recall that the person who creates the trust must maintain the home for a certain period to keep the trust qualified for tax exclusions.
- To hedge against the QPRT outliving me, should I consider transferring fractional interests in the home? Should I create a series of qualified trusts that expire at different times, each holding various percentages of the home’s value?
- What if I’ll need access to mortgages and other home loans?
As the trust owns the home, the grantor may lose certain benefits, and cannot tap the house for loans or refinance it. If you are able to put a mortgaged home into the trust, you can deduct the interest until the end of the QPRT term. But, as with most irrevocable trusts, a mortgage complicates title transfers. And mortgage payments are, in part, taxable gifts to the beneficiary. Have a professional walk through these topics with you before creating any type of irrevocable trust.
Knowledge for Your Estate Planning Journey
In the right circumstances, and with a little luck, the qualified personal residence trust can offer asset protection and tax savings to help support selected beneficiaries. Perfect planning is tricky because we only have a rough idea of our life expectancies. Moreover, new administrations mean new lawmaking. It’s impossible to know what the tax code will look like at some future time.
The information we offer here is not legal or tax advice. A QPRT fits only certain sets of financial circumstances. It’s vital to consult with professionals and to look at your array of options with case-specific advice in mind.
That said, every homeowner should know the basics of the various types of trusts that hold houses. The QPRT is just one example of many possible tools for your estate planning journey.
Supporting References
Internal Revenue Code § 25.2702-5: Personal residence trusts.
Pergament v. Joseph Yerushalmi, 487 B.R. 98 (Bankr. E.D.N.Y. 2012).
James P. King, The ABCs of QPRTs, Journal of Accountancy (Oct. 2006).
Fidelity Viewpoints: Leaving Your House to Your Loved Ones (Sep. 2020).
Photo credits: Grant Durr and Leon Seibert, via Unsplash.