Trusts fall into two seemingly simple categories: revocable or irrevocable. However, things get more complicated from there. One type of irrevocable trust is a Qualified Personal Residence Trust. This is useful because the value of the home is not counted as part of your estate when it is in this trust. Timing is crucial when using a QPRT to pass on property to beneficiaries, so here is what you need to know when deciding whether this option is right for you.
A QPRT is irrevocable because a person or couple no longer owns a home after it is placed in the trust. The property is instead owned by the trust, so the grantor or grantors can no longer make changes once the trust is finalized. Since you don't own the property, it is not counted among your assets for estate tax purposes.
There is no escaping Uncle Sam altogether, but a QPRT is intended to lower the amount you or your beneficiaries must pay. This is because items in the trust count as a gift instead of being part of your estate. You may need a QPRT if the value of your estate, including your home, is near or more than $5.45 million. This is the lifetime gift exemption amount that you can give away without a gift tax applying. Anyone with an estate larger than this could pay taxes on anything over this amount, and the highest rate you could be subjected to is 40%.
It could be around $300,000 for a $1,000,000 home. Even if your home is valued at one million dollars, this does not mean you are using $1,000,000 worth of your gift exemption. When gifting a home to beneficiaries through a QPRT, they do not receive the property right away since you are still alive and residing there. This means the value of the gift can be calculated at a lower rate since it will take years for your beneficiaries to fully own the property.
The reduced amount that your gift is valued at depends on multiple factors, but the most important factor is how many years the trust stipulates that you reside in the house for. The longer you occupy the home, the smaller the amount of the gift exemption used will be. When the QPRT ends, the property goes to your beneficiaries or into a trust for them. You or your spouse must still be alive when this transfer happens. If you pass away while the QPRT is still active, the property becomes part of your estate and estate taxes apply.
One must carefully consider a QPRT so that the time one retains the right to live in the home provides a sufficient lower gift value but is not so long that one passes away. You can also have two QPRTs if you have two properties like a regular residence and a vacation home.
You do not have to worry about being evicted once the property is transferred. You are not allowed to buy the property back, but you can lease the home and pay rent to the beneficiaries. A QPRT is normally used when the beneficiaries are the grantor's children. This offers another benefit as paying rent gives you another way to pay pass more of your estate to heirs while still alive. This is not part of the gift exemption rate since you are paying rent, but taxes still apply as the money is taxable income for the beneficiaries.
It is important that you are paying a fair price for rent and that your children are listing this additional source of income. The IRS is well aware of how Qualified Personal Residence Trusts work and could check to ensure you are following the rules.
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