QPRTs are one of those exotic sounding estate planning tools that many clients have heard of...but not much else. Perhaps a friend or acquaintance has one, perhaps a financial planner has mentioned it in passing.
Well, maybe its time to begin thinking of QPRTs anew. As a recent Wall Street Journal article states, the depressed housing market may offer an ideal situation for the gifting of a personal residence using QPRTs.
A QPRT (Qualified Personal Residence Trust) is an estate planning vehicle whereby a grantor (the owner of the home making the "gift") transfers a personal residence to a trust for a certain number of years. The QPRT holds the property for a specific term during which the grantor can remain living there. Once the QPRT term expires, the residence then passes to the named beneficiaries.
The benefit here is that the value of the home is then outside of the grantor's estate for estate tax purposes. The grantor would be required to file a gift tax return for the year the transfer to the trust was made, but no tax would be due as long is the value of the residence was under the $1M lifetime gift tax exemption (counting all previous gifts made).
Transferring the residence to a QPRT may also suppress the value of the house, meaning less of a credit is taken. As the article states:
The formula [for determining the value of the gift], among other things, considers your age, the IRS's current
applicable federal rate of 3.8%, which is the federal interest rate
used to set up trusts or loans to relatives, and the [assumed for the purposes of the article] 10-year length of
the trust. Assuming your home appreciates 4% a year, the formula can
nearly halve the value of your house for gift-tax purposes.
Using the current depressed home values at a starting point, a QPRT may make sense for those in danger of exceeding the exceeding the then-in-effect estate tax exemption.
Some things to consider: a QPRT is an irrevocable trust- there is no unscrambling this egg. At the end of the term, the grantor may then have to pay his or her beneficiaries rent to remain in the home. Also, the grantor MUST outlive the term of the trust or the entire value of the residence comes back into the grantor's estate for estate tax purposes. Care4 must be talen to take into account the overall health and life expectancy of the grantor.
