A Qualified Personal Residence Trust (“QPRT” or “House
GRIT”) is an estate planning vehicle which can reduce estate taxes
by removing the family home out of an individual’s taxable estate.
It is accomplished by the transfer of the personal residence into a trust
that has certain required provisions in which the settlor (the owner of
the home) retains the right to live in the residence for a specified terms of years.
The QPRT has been expressly sanctioned by the Internal Revenue Code and
has several tax advantages. First, it allows the Settlor to make a leveraged
gift of a valuable asset while continuing to live in the residence. The
leveraging occurs because the value of the gift is reduced by the value
of the settlor’s right to remain in the home. Obviously, the longer
the specified term of years the greater the reduction in the value of
the gift. Second, the QPRT is a way to pass on the appreciation on the
value of the home without any out-of-pocket expense to the donees. Hopefully,
the value of the home will continue to increase in value during the specified
term of the trust. Third, the donee’s (the children or other beneficiaries)
do not have to come out of pocket with cash. And, finally, it is the only
tax advantaged means of passing on a family residence.
Of course, every form of estate planning has some disadvantage. For the
QPRT the first disadvantage is that the Settlor must survive the term
of the QPRT for this technique to work. If the Settlor dies within the
specified term of years, the entire then current fair market value of
the house is includable in the Settlor’s estate. Second, the QPRT
must be carefully drafted and administered in accordance with Internal
Revenue Code regulations. Third, upon the expiration of the specified
term of years, the Settlor must vacate or rent the home for fair market
value. Fourth, the Settlor makes an irrevocable gift and loses access
to the capital value of the home. Fifth, the QPRT requires some guess-work
as to how long to choose for the term of the trust. Picking a long term
reduces the value of the gift when made but increases the potential risk
that the home will be includable in the estate if the Settlor dies before
the expiration of the term. Finally, the value of the home may go down
during the term as opposed to going up.
There are no income tax consequences in the transfer of a home to a QPRT.
Also, the Settlor should be able to continue to deduct interest as qualified
residence interest and the Settlor should continue to qualify for the
homestead exemption. The home can be sold during the term of the trust
with the proceeds remaining in trust and the Settlor should still be eligible
for the $500,000 lifetime exclusion from income tax.
The QPRT works best in situations where the residence has a substantial
value, the tax basis in the residence is high relative to its fair market
value and the Settlor is comfortable with the possibility of having to
rent his home at a fair market value or move out at the end of the QPRT term.
While QPRTs are not beneficial to everyone’s estate plan, they do
serve as a valuable tool for reducing estate tax for certain individuals.