QPRT: Estate Planning Considerations for Tax Savings
As a result of The Tax Cuts and Jobs Act, which doubled the estate and gift tax exemption for individuals from $5.49M to $11.18M, many families are taking advantage of opportunities to shield additional assets and implementing proactive tax-saving strategies. One such strategy is the use of a Qualified Personal Resident Trust (QPRT).
Like the Spousal Lifetime Access Trust, which you can read more about here, the QPRT is an irrevocable trust, which in this case transfers the ownership of an individual’s residence into a trust. Under the QPRT structure, the property owner is able to remain living in the residence rent-free, during which time the value of the property is removed from the owner’s taxable estate.
As you consider how a QPRT might fit in to your estate plan, be mindful of the below.
- A QPRT reduces gifting exposure by freezing the value of the home for the duration of the trust period. This can be particularly beneficial when real estate markets are seeing increasing home values. While the exact value of the property is dependent on interest rates at the time the trust is created, upon gifting to beneficiaries, properties can sometimes see values as much as half of the fair market value. Oftentimes, the gift value is also discounted based in part on the terms of the trust.
- During the trust’s retained income period, you still get all property tax benefits.
- The property owner can still enjoy the benefits of living in their own home both during the trust’s retained income period as well as afterwards (the beneficiaries can “rent” the property back to the owner for fair market rent).
- At the completion of the trust period, the residence is transferred to the trust’s beneficiaries—typically the owner’s family members.
Be Sure to Consider
- In order to reap the benefits of a QPRT, the person who creates the trust must outlive the trust’s retained income period. If he/she passes away before the trust term ends, the property reverts back to its full value as it relates to the owner’s estate.
- Unpaid mortgage payments would be considered additional gifts to the trust, therefore, it’s wisest and less complex to consider a QPRT in the case of a property who’s mortgage has already been paid off.
- After the trust’s retained income period ends, the owner would be required to pay rent — typically fair market rent or slightly below — to his/her heirs in order to continue living in the residence.
- QPRTs are most beneficial to families who intend to keep the applicable property in the family. If a sale occurs after either a) the trust term ends or b) the property owner passes away, capital gains taxes would apply based on the difference between the sale price and the original owner’s income tax basis at the time of the trust creation. Families should weigh the value of the estate savings versus the potential step up in basis.
A QPRT can provide an appealing opportunity for families to minimize their gift tax exposure while also ensuring that an important family asset (in this case, the owner’s primary or secondary residence) is left to loved ones with positive tax implications.
Interested individuals and families should consider all of the above as well as speak with a tax advisor to ensure all short and long-term implications are carefully considered. Please reach out to the Individual & Family Tax Team at The MFA Companies if you’re interested in learning more about QPRTs or for general assistance with navigating your estate planning needs.
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