With the slow real estate market and falling housing prices, this may be the best time to do some estate planning and cash in on your home’s lower value by using a Qualified Personal Residence Trust.
What is a Qualified Personal Residence Trust?
A Qualified Personal Residence Trust, or QPRT (pronounced ‘Qupert’), is an irrevocable trust designed to hold your primary or a second residence.
The QPRT is a trust specifically permitted by IRS regulations. The Grantor, or creator of the trust, gifts their home to the trust and retains use of the residence for a set number of years, called the “retained period.” By retaining use of the home for a certain number of years the Grantor is entitled to a discount on their gift to reflect this retained use.
For example, if Dad transfers his $300,000 vacation home to a QPRT and retains use of the residence for ten years, Dad would have transferred the $300,000 home but would only have $165,855 of the transfer counted as a gift for gift tax purposes. The other $135,145 reflects the value of the retained period, so is not included as a gift. In ten years, appreciating at 3% per year, the home will be worth $403,175. So the benefit is that in ten years the real estate will be out of Dad’s estate, Dad will have transferred $403,175 of value and future appreciation by making a gift of only $165,855.
Also remember that each individual (under current law) is allowed a $1 million lifetime gift tax exclusion for taxable gifts made. Therefore Dad would utilize $165,855 of his $1 million exclusion and would not actually be required to pay the gift tax to the IRS (assuming he had not used up his $1 million exclusion on prior gifts).
So is there a down side to a QPRT?
During the retained period the Grantor continues to use their home just as they did before.
If the Grantor does not survive the retained period, then the residence is added to their estate for estate tax purposes, though the amount of unified credit utilized when the gift was made is reinstated. In our example, if Dad dies before the ten years has elapsed, the $300,000 home would be added back to his estate, however the unified credit he used when making the gift ($165,855) would be reinstated.
Assuming the Grantor survives the retained period, they will have to pay fair-market-value rent for the use of the residence to the trust, which is why this idea is often more attractive when used for second homes rather than the principal residence.
So strike now while the proverbial iron is hot (and real estate values are down!) and take advantage of all our estate tax laws have to give.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Attorney Eric L. Green is Of Counsel to the law firm of Convicer & Percy, LLP in Glastonbury, Connecticut (www.convicerpercy.com), where he focuses his practice in civil and criminal taxpayer representation before the IRS and state tax authorities, business planning and estate planning. Attorney Green represents taxpayers in Western Massachusetts and all of Connecticut. Attorney Green is currently the vice chair of the Closely held Business Tax Committee of the American Bar Association, and is on the Executive Committee of the Connecticut Bar Association’s Tax Committee. He can be reached at egreen@convicerpercy.com.
