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What is a Qualified Personal Residential Trust (QPRT)?

A QPRT is a form of irrevocable living trust designed to reduce the amount of gift and inheritance tax generally incurred when transferring an asset to a beneficiary. According to the law, the QPRT is a proper legal technique to protect an individual’s assets for the beneficiaries thereof and protects those assets from creditors and lawsuits. An irrevocable trust cannot be changed in any way while the trust is in effect. This helps ensure that a judge cannot simply order a person to turn over protected assets to creditors or change the circumstances of the trust that would allow others to get the asset.

Once the residence has been transferred to the trust through a properly prepared and executed deed, the assignees retain the right to live in that home for a set number of years. As long as the owner resides in the house, no rent will be paid. The owner is responsible for all housing expenses, such as repairs, property taxes, and maintenance fees, which are covered by Revenue Procedure 2003-42. [2003-23 IRB 993 section 4 Art. II (B) (2)]. If the owner is still alive after that predetermined number of years, the trust automatically transfers ownership of the home to the owners’ beneficiaries without having to pay estate taxes. Recipients can rent the house to the original owner of the house. The most attractive part of this plan is that by paying rent after the QPRT ends, the owner transfers additional assets to his beneficiaries without having to pay any gift or inheritance tax. Having received the rent money from the parents does not prevent them from returning the money to the parents. If the home is sold, the proceeds of the sale can be used to purchase another home or other items for the parents at the beneficiary’s desire.

The main advantage of the QPRT is the tax savings it provides to the property owner and the beneficiaries of the trust. When the residence is transferred to the QPRT, it counts as a gift, but a typical IRS gift tax is not calculated. Instead, the IRS calculates a modified gift tax based on published tables and the total time the home remains in the QPRT, which is applied to the value of the home. Once the trust’s time period, which is agreed to when creating the QPRT, ends and the owner is still alive, the residence passes to the beneficiaries free of any gift or inheritance taxes.

If the value of the residence has increased since its original appraisal, the gift tax is based on that value of the home, as calculated by the IRS, and not on the increase in value of the home. If the value of the home does not increase or stays the same, the recipients will not have to pay any gift tax on the home.

Another benefit of the QPRT is that tax benefits can be enhanced if a husband and wife own the home jointly. Pursuant to Treasury Regulations section 25.2702-5(c)(2)(iv), a husband and wife may transfer one half of their property in the home to two separate QPRTs. Each separate QPRT allows the owners, husband and wife, to live in the residence for a set number of years under the terms of each QPRT. In the event that an owner dies before the end of the QPRT, the half that was in the trust would be put into the estate and would be subject to inheritance and gift taxes. So what if you want to sell the home that is under a QPRT and buy a new home? The QPRT trustee would simply sell the old house and buy a new one in the name of the QPRT. If the value of the new home is greater than the value of the old home, then the trustee must pay with separate funds and retain ownership of that part of the home.

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