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Hopp & Associates, pc
Attorneys and Counselors at Law
353 Main Street
Longmont, Colorado
303 • 776 • 4045
Simple Sophisticated
Estate Planning
Wealth Planning News
Vol. II, No. 9
QPRTs
A QPRT is a Qualified Personal Residence Trust. Use it to:
Gift a residence to loved ones with minimal gift taxes, keeping the right to use the residence.
Minimize estate taxes by shifting future growth in value of the residence to loved ones.
Provide for some greater degree of asset protection for a residence than the laws of many states allow for a "homestead exemption."
Keep all of the income tax benefits of home ownership during the QPRT term.
How does a QPRT work?
The QPRT is an irrevocable trust to which you transfer your residence, keeping the right to use the residence for a term of years. At the end of the term, the residence passes to your loved ones outright or in trust.
If you are married, the residence can pass to a trust for the benefit of your spouse for life (we sometimes call this a “Super” QPRT), before going to your descendants.
What residence will qualify?
Your principal residence and one vacation home will qualify for a QPRT. A qualifying residence can be your house, condo, houseboat, or your stock in a cooperative development. The QPRT can include appurtenant structures and land used for residential purposes. But you cannot include furniture and other personal property.
You can also put fractional interests in your residence and vacation residence into a QPRT. But each QPRT can hold only one property.
For married couples we recommend a conservative approach of making a separate QPRT for each spouse’s fractional share of the residence.
Effect of death during the QPRT term
If you die during the term of the QPRT, the residence is thrown back into your taxed estate. In that case you are no worse off than if you had never created the QPRT. So you have little to lose when you make a QPRT, except for the effort to set it up.
Term note: Obviously, the older you are when you make a QPRT, the greater the discount for possible reversion to your estate because there is a greater possibility you will die during the term period. So a QPRT is usually created for a term that is definitely shorter than your actual life expectancy.
Gift Tax Advantages
The value of a gift to the QPRT is the appraised fair market value of the residence, less the value of your right to use if for the term of years. So the gift value is far less than the total market value of the residence.
No annual exclusion: A gift to the QPRT will not qualify for your annual gift tax exclusion, so you use up some of your unified credit. But the amount of unified credit used up for the gift to the QPRT is far less than the total value the residence would have at your death.
In This Issue
QPRTs
How does a QPRT work?
What residence will qualify?
Effect of death during term
Gift tax advantages
Estate tax advantages
Asset protection advantages
Income tax issues
Estate Tax Advantages
The residence and growth in its value are shifted out of your taxed estate. Result: Possible significant estate tax savings for your descendants.
Asset Protection Advantages
A residence in a QPRT is better protected from creditor claims. That can be a significant benefit because of the low homestead exemption available in most states.
Income Tax Issues
Since the QPRT is a grantor trust during its term of years you can deduct mortgage interest. Also, your $250,000 ($500,000 for married couples who file jointly) capital gain exclusion is available on sale. After sale you can move to another residence, and the new residence can replace the one you originally put into the QPRT. Alternatively, the trustee (you are usually the trustee) must begin paying you an annuity for the remaining term of the QPRT. The annuity amount is based on certain facts that existed when the QPRT was created. In essence, if the residence is sold, to the extent of any sales proceeds not invested in a new home, the QPRT is converted into a grantor retained annuity trust (sometimes called a GRAT).
At the end of the QPRT the grantor trust status goes away. Hint: If the residence is ever going to be sold, sell the residence before the term ends. Or find a way to rent it from your loved ones at term end, shifting more estate tax free dollars to them.
A QPRT is one of the gift and estate tax breaks available to you. It is like a coupon you can use or throw away. If you have a taxed estate you should often use this coupon instead of wasting it.
For more information on this topic call us to arrange for a free consultation.