Residential property is often a homeowner's most valuable asset. Protecting that investment is a top priority, especially if the property is a long-term investment for many generations to come. Therefore, preserving assets and minimizing tax burden is a common concern among wealthy homeowners. One way to do this is through a specialized trust called the Qualified Personal Residence Trust (QPRT).
What Is a QPRT?
A Qualified Personal Residence Trust is designed to reduce the amount of gift and estate tax that is incurred when transferring ownership of a home to an heir or beneficiary. It can save wealthy homeowners hundreds of thousands of dollars in estate taxes when they pass away.
If you are single and your taxable estate exceeds the federal inflation-adjusted gift and estate tax exemption ($11.18 million for 2018), you will be subject to an estate tax rate of up to 40 percent.
How Can a QPRT Work for You?
You can transfer your property to a QPRT, retaining only the right to live in the home for a fixed period of time. At the end of the fixed period, the ownership then passes to your designated beneficiaries. You may also remain in the home at the end of the period by renting it back, but you must pay fair market rent. This will further diminish your taxable estate value.
Will You Incur Taxes at the Time of the Transfer?
The transfer of ownership via a QPRT is a taxable gift at the time it is made. However, the value is reduced based on the fixed period you choose to remain in the home. The longer you remain, the smaller the value of the gift. Depending on the planning structure of the QPRT and whether any prior gifts were made, you may not have to pay taxes at the time of the transfer. Your tax advisor can work with you to make this determination.
Is a QPRT Flexible?
A QPRT can be designed to provide a degree of flexibility. However, it's important to understand your full financial picture and that of your beneficiaries. Your attorney, tax and financial advisor can work with you in building flexibility and options using your high-value real estate, whether in a QPRT or other advanced planning vehicles.
Owning a home in a wealthy neighborhood gives you options, but it is important that you work with advisors who have experience in estate and gift tax laws to ensure the option you choose is the right fit for you and your family.
In General, Keep in Mind:
Think ahead of time about the value of your real estate and the tax impact it may have at your death.
Ensure that your estate will have enough liquidity to pay the estate tax due. The use of life insurance can provide immediate access to cash, and when used within a trust structure can further reduce the estate-tax liability.
Advanced trust planning techniques such as a QPRT can help reduce estate tax. However, careful planning needs to be done to provide flexibility and to address the unique needs of your family.