Qualified Personal Residence Trusts

Our uncertain estate-tax environment has made traditional estate planning more complicated; however, there are still some estate planning tools that are worth considering. The qualified personal residence trust (QPRT) is one such tool.

A QPRT is an irrevocable trust created by a homeowner during their lifetime. The homeowner transferrs title to their personal residence to the QPRT and the homeowner retains the right to reside in the personal residence for a term of years (typically somewhere between five to fifteen years). Thereafter, the trust beneficiary receives full title to the personal residence.

If the homeowner survives the period of time specified in the trust, then their personal residence will not be included in their taxable estate. This has the added benefit of removing the increase in value of the personal residence that occurs after the homeowner transfers the personal residence to the trust from the homeowners’ taxable estate. This added benefit can be powerful if the price of real estate continues to increase as they have recently.

On the other hand, the personal residence will be included in the homeowners taxable estate if they fail to survive the period of time specified in the trust. This risk is minimal since this is the same result had a QPRT not been created. The only advantage that homeowners lose if they pass away before the period specified in the trust is the gift taxes that are paid to contribute the personal residence to the trust. Even then, the gift taxes are only imposed on the remainder value - - not the full value - - of the personal residence at the time of the transfer. QPRTs are most often used for high net worth families who own unencumbered real estate that is valued over $ 500,000 to $ 750,000 and where the homeowner is healthy and has a life expectancy that exceeds the term of the trust.

Even if the estate tax were to be repealed, the QPRT could still be beneficial in that the homeowner’s personal residence could be transferred to lower generations, who might be able to use the tax attributes associated with real estate to offset their earned income. Moreover, if the lower generations wished to live on the property prior to or following the homeowner’s demise and then sell the property shortly after the homeowner’s demise, the lower generations might be able to use that period of time to qualify for the $250,000 income tax exclusion when the property is sold. For these and other reasons, high net worth homeowners should still consider establishing a QPRT for their personal residences.

By: Kreig Mitchell
1942 Broadway, Suite 314
Boulder, CO 80302
Ph. 303.521.0053
http://www.coloradotrustattorney.com/

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