Decreasing overall tax liability is an important goal for estate planners. A qualified personal residence trust (QPRT) is an irrevocable trust that allows you to remove your home from your taxable estate. Moving a primary or secondary home into the trust could help your future beneficiary lower the amount of gift taxes he or she must pay.
If you have questions about whether a qualified personal residence trust is right for your estate plan, Palmer & Slay, PLLC is here to help. Our Mississippi estate planning attorneys have extensive experience and can help you make informed decisions about complex estate planning techniques. Whether you are just starting the process of creating an estate plan or you’d like to update your current estate plan, our skilled attorneys are ready to help you meet your goals.
How Do Qualified Personal Residence Trusts Work?
When a person creates a QPRT, the homeowner can continue living in the residence with “retained interest” until a specific date. After the date outlined in the trust agreement, the remaining interests and ownership of the home are transferred by law to the named beneficiary of the trust. The value of the real estate property will usually increase after the trust has been created.
The Internal Revenue Service (IRS) calculates the home’s increased value using minimum market rates. When using a QPRT, the homeowner retains part of the interest in the real estate. For that reason, the IRS will calculate the gift value of the property at a lower rate than the fair market value. Additionally, the gift tax may be lowered through a unified credit which sets the dollar amount an individual can give to his or her beneficiaries before estate-related taxes are applied.
Qualified Personal Residence Trusts Are Irrevocable Trusts
Qualified personal residence trusts are a type of irrevocable living trust. As the name implies, you will not be able to revoke or change the terms of the trust after it has been funded. Using an irrevocable trust is one of the best ways to protect your assets from creditors, and the asset protection benefits of a QPRT come into effect because this type of trust is irrevocable. Creating a QPRT may not be the best strategy for estate planners who would like to maintain ownership and control of their real estate.
How Long Can a QPRT Last?
When setting up your qualified personal residence trust, it’s important to understand that you’ll still be alive when the trust expires. There isn’t a set time limit for the term a QPRT can last. However, setting the term length is one of the most important aspects of QPRTs. The trust agreement should include an expiration date before you pass away. If you pass away before the term length expires, the property will go back to the estate and its value will be subject to estate taxes. In this scenario, the estate planner would lose the tax benefits.
Determining the length of the trust agreement can be difficult. The longer the term of the trust, the greater the potential reduction in the amount of gift taxes your beneficiaries will need to pay. However, you will need to ensure that there is a low possibility you will pass away before the expiration of the trust. It is common for qualified personal residence trusts to be established for 10, 15, 20 years, or sometimes longer.
Estate planners can sell a home that has been placed in a qualified personal residence trust and purchase a new home. They must transfer the ownership of the new home into the existing qualified personal residence trust.
Asset Protection Benefits
Asset protection is one of the most important benefits of creating a qualified personal residence trust. Estate planners can remain living in their homes while the trust is in effect. At the same time, the residence will be protected from creditors and judgments. Homeowners can maintain control of their residences, meaning they can update or remodel their homes if they would like to do so during the term of the trust.
Gift Tax Benefits
When transferring a home into a qualified personal residence trust, the home will be considered a gift by the IRS, but the IRS will use modified gift tax methods to determine the value of the home. If the home has appreciated in value since it was initially appraised, the gift tax amount will be based on the home’s initial value, not the value of the home when the trust expires. As a result, the beneficiaries can save a significant amount of money. The gift tax amount will be less than it would be if the homeowner had directly transferred the home to his or her beneficiary through a last will and testament. If the home’s value didn’t increase or stay the same, the beneficiaries wouldn’t have to pay any gift tax.
Estate Tax Benefits
Using a qualified personal residence trust can come with a state tax benefit when a husband and wife own the home jointly. A husband and wife can both transfer half of their ownership in the home into two separate qualified personal residence trusts. Each QPRT allows the husband and wife to live in the residence for a specific number of years based on the conditions of both of the trusts. If one of the homeowners passes away before the trust ends, his or her interest will revert back into the estate, and gift and estate taxes will apply.
Learn More About the Benefits of a Qualified Personal Residence Trust
For many, a person’s home is his or her most long-term and valuable asset. Establishing a QPRT is an effective strategy to protect your home from potential creditors while taking advantage of several tax benefits. Palmer & Slay, PLLC has helped many Mississippi residents draft, fund, and manage qualified personal residence trusts. If you have questions about whether a QPRT is right for you, we are prepared to answer your questions and guide you through the estate planning process. Contact Palmer & Slay, PLLC to schedule an initial consultation with an experienced attorney.