What is a Qualified Personal Residence Trust?

June 20, 2022

A Qualified Personal Residence Trust (QPRT) can be a useful tool during the estate planning process. The purpose behind this type of trust is to allow a homeowner to transfer their primary residence or a secondary residence (like a vacation home) into a trust, but still maintain the right to live in it for a specified amount of time. The time period is referred to as the “retained income period”.

A QPRT is an irrevocable trust, which means it cannot be revoked or modified (although there may be ways to decant irrevocable trusts in certain situations). The property is retitled to the trust and removed from the owner’s remaining estate. This reduces future tax burdens to any beneficiaries of the future estate by lowering the net value of the estate at the time of death. Essentially, this creates a gift of the property to future beneficiaries.

Pros of a Qualified Personal Residence Trust

- The main purpose is to reduce the size of the taxable estate. It not only removes the current value of the property, but any future appreciation as well.

- The other driving benefit to create this type of trust is that it allows the grantor to remain in the home rent-free for a specified time period. An outright gift would not allow this. As the continuing resident of the property, you can profit from any tax deductions associated with living in and owning the home.

- The trust encourages beneficiaries to keep the property in the family. The trust can contain certain language to that effect to express the wishes of the grantor.

Cons of a Qualified Personal Residence Trust

- The main con is that it is irrevocable. It is difficult to revoke or modify. This means if you or your family experience a situational change that requires the sale of the property, that may not be feasible.

- If you choose to live in the home beyond the time frame specified in the QPRT, you will have to pay rent at fair market value. It is only rent-free for the time period originally specified in the trust.

- If you choose to sell the property at the end of the retained income period, you will owe any capital gains taxes. These are calculated by comparing your income tax bracket at the time of the creation of the QPRT to the price of the sale of the property.

- RISK ALERT: If you pass away before the end of the retained income period, the QPRT is essentially void and the value of the residence will be included in your final estate.

The QPRT needs to be drafted by an experienced estate planning attorney and the deed to the property need to be retitled into the name of the QPRT. The retitling of property is what funds the trust. You also need an appraisal of the residence from the date you transfer the property and record the new deed. To discuss this strategy in more detail, contact the estate planning attorneys at Stouffer Legal in the Greater Baltimore area. You can schedule an appointment by calling us at (443) 470-3599 or emailing us at office@stoufferlegal.com.

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