When you delve into the subject of estate planning you invariably see a veritable alphabet soup of acronyms that represent rather wordy legal instruments. If you’re not especially familiar with the field they can all be somewhat confusing, so we endeavor to take a look at some of these and demystify them for our readers from time to time. With this in mind today we would like to take a look at the estate planning vehicle often referred to as the QPRT.
QPRT in an estate planning context stands for a qualified personal residence trust. These trusts are generally used to help people remove the value of their homes from their estates in an effort to gain estate tax efficiency. To employ this strategy you place your home into the trust and name beneficiaries who will ultimately assume ownership of the property.
When you are drawing up the trust agreement you set a term during which you will continue to live in the home in a rent-free manner. So your life doesn’t change in any material way, but the act of funding the trust with the home does remove it from your estate for estate tax purposes.
The creation of the trust is seen as a gift in the eyes of the IRS that is subject to the gift tax. However, the taxable value of the property in question is reduced by the interest that you retain while you are still living in the home.
As a result, the taxable value of the property is much less than its true fair market value. In many cases this value will be less than the gift tax exemption that is available to you. If this is indeed the case, the transfer of your home to your beneficiaries will eventually have taken place in a tax-free fashion.