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Qualified Personal Residence Trust

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.