Qualified Personal Residence Trust (QPRT) Definition
A qualified personal residence trust (QPRT) is a particular kind of irrevocable trust that enables its founder to exclude their primary house from their estate in order to lower the amount of gift tax owed when transferring assets to a beneficiary.
In qualified personal residence trusts, the owner of the home is given a temporary “retained interest” in the property; after that time expires, the remaining interest is given to the beneficiaries as a “remainder interest.”
Depending on how long the trust lasts, the value of the assets throughout the retained interest period is determined using the Internal Revenue Service’s (IRS) appropriate federal rates (AFR). The property’s gift value is less than its fair market value (FMV), resulting in a lesser gift tax obligation because the owner keeps a portion of the value. A unified credit can also be used to reduce this tax.
The Functions of a QPRT (Qualified Personal Residence Trust)
When the trust expires before the grantor’s passing, a qualified personal home trust may be helpful. If the grantor passes away prior to the term, the property is a part of their estate and is taxable. Determining the length of the trust agreement and the possibility that the grantor would pass away prior to the expiration date provide a risk. Theoretically, shorter-term trusts gain from beneficiaries receiving smaller remaining interests, which lowers the gift tax. However, this is only beneficial to younger trust holders who are less likely to pass away before the trust’s expiration date.
Other Trust Forms and the QPRT
A qualified personal dwelling trust is just one of several kinds of trusts that exist. A bare trust and a benevolent remainder trust are two other examples. A bare trust gives the beneficiary complete control over all of the trust’s assets, including cash and non-cash items like real estate and collectibles. The recipient also receives all of the trust’s income (such as rental income from properties or bond interest).
A donor may give a non-charitable beneficiary an income interest in a charitable remainder trust, with the remaining trust assets going to a charitable organization. There are two different kinds of charitable remainder trusts: the charitable remainder annuity trust (CRAT) and the charitable remainder uni-trust (CRUT).
A QPRT illustration
Think about a parent who wants to leave their $500,000 house to their child. The parent does not currently have any plans to leave the home. The parent creates a qualifying personal residence trust for a period of ten years in order to lessen the tax burden on their estate.
The house increases in value to $750,000 in ten years. The $250,000 in profits will not be subject to taxes because the house is covered by a QPRT. To put it another way, the parent will only be responsible for gift taxes on the $500,000 worth of the house that is held in trust. Over the course of the ten years, the house’s worth will likewise decrease.
At the end of the period, the parents have no ownership interest in the home. Either they must vacate the property or sign a lease. Additionally, the tax advantages won’t be available if the parent passes away before the trust’s term is up. QPRTs may also include a number of restrictions on the neighboring property, living longer than the trust, and selling the house before the term is up.
