New York Estate Planning & Elder Law Blog
While it has fallen out of favor in the last few years, the “Qualified Personal Residence Trust” (QPRT) is gaining traction once again as an estate planning option for people who wish to transfer their home to the next generation when they pass away. The QPRT allows for a parent to transfer their home to their children with the minimum amount of taxes while the parent continues to live in the home.
Reasons for Establishing a QPRT
The main purpose of establishing a QPRT is the state and federal tax benefits. If the family home is a significant asset, or the most significant asset, in the estate and the family believes that it will appreciate in value then a QPRT might be a viable option for tax savings. This is also incredibly important if you believe that the value of the home would exceed the estate’s value above the federal tax exemption limit of $5.43 million for 2015. Placing the home inside of a trust will shield it from the estate taxes by effectively removing the residence from the estate.
Another reason why people prefer the use of a QPRT is that it gives the children control over the home, its expenses, and other maintenance while their parent still resides in the house. It eliminates the need for the parent to manage all of the daily tasks that are associated with home ownership and transfers that responsibility to the child. The parent gets the peace of mind that they can remain in their home for as long as they wish, and the child is also relived knowing that their parent cannot be forced out of the home for financial reasons.
Specifics of a QPRT
When a QPRT is created, the creators of the trust must pick a term of years that the trust is enacted. The current owner of the home receives a lifetime interest in the property through the term of years attached to the QPRT, and after that period of time the ownership of the home is transferred to the beneficiaries of the property that are usually the children or grandchildren of the homeowner. After the transfer, the Internal Revenue Service (IRS) determines the value of the lifetime and remainder interests in the home and apportions that for gift tax purposes.
In order for a QPRT to be successful the homeowner needs to outlive the term of years placed on the trust. If the homeowner passes away before the trust ends, then the home is transferred back into their estate for tax purposes. Determining the term of years in a QPRT is a balancing act: the longer the term, the more estate tax benefits but the shorter the term, the less risk is involved of the grantor passing away. Typically, the common QPRT terms are five, ten, and sometimes fifteen years.
If the QPRT is successful and the child wishes for their parent to remain living in the home, then the parent would need to pay an arm’s length rent to the trust. While some families balk at the idea, in the end it is actually beneficial because it allows your parent to remove additional funds from the taxable estate.