Since the burst of the housing bubble a few years ago and the subsequent crash of real property value, many of the clients who have come into our office have bemoaned the lowered value of their homes, but we have good news for these clients: You do have options.
One of those options is a QPRT (Qualified Personal Residence Trust) a specific kind of trust which allows you to continue living in your home, while at the same time removing it from your taxable estate. Sound too good to be true? It almost is. In fact, this article in Reuters calls it “a chance for clients to have their proverbial cake — a sweet vacation home in Florida, for example — and eat it, too.”
Here is how it works: “In a QPRT, the grantor transfers up to two residences into an irrevocable trust and retains the right to use the home for a pre-determined period, or trust term. Terms can vary widely — 10 years is typical, but can run for 40 — and the idea is to make sure grantors outlive the term… Once the term concludes, the grantor then pays rent to the trust. The beneficiaries become landlords, and open a brokerage-type vehicle to receive payments titled to the trust. There’s no income tax on those payments, a big plus for beneficiaries.”
The reason the QPRT is such a boon right now, while property values are low, is that grantors are able to “gift” the residence into the trust while the value is low and still under the gift tax exemption amount. If the value of the property increases over the term of the trust (which it almost certainly will) the grantor does not have to pay gift tax on that increase, but the recipients of the trust will still benefit from the increased value.
The QPRT appears to be a perfect tool for gifting property to children, but you do want to be careful about how you structure the trust, and consider carefully your relationship with your children. Once the trust term is over the property belongs to the beneficiaries (your children.) Many families arrange to have the grantor continue to live in the home, but begin paying rent to the beneficiaries once the trust term is up; however, the beneficiaries have no obligation to allow the grantor to continue living in the property.
And if you think you can escape the eviction concern by simply making the term of the trust so long you’re likely to pass away before the term is up, think again. “Die before the term’s up and your property reverts to the estate and takes an estate tax hit. That’s why planners stress picking a term you and your spouse expect to outlive.”
If you feel a QPRT may be a good planning tool for your family, give us a call. We can answer any questions you have and help you determine whether a QPRT could benefit you.