Qualified Personal Residence Trust

What is a Qualified Personal Residence Trust?

A Qualified Personal Residence Trust is an irrevocable trust to which an individual (The grantor-usually a senior family member) transfers a personal residence, reserving the right to occupy and use the residence for a specified number of years. At the end of the term, the trustee of the trust distributes the residence to the designated beneficiaries (usually the grantor's children) or retains the residence in trust for a later distribution to the beneficiaries. If the trust continues, the trustee can lease the residence back to the grantor at market rent rates without causing the residence to be included in the grantor's estate.

What is the definition of a personal residence in eyes of the IRS?

A personal residence is the principal residence of the grantor and one other residence such as a second home which must be used for personal use by the grantor the greater of 14 days or 10% of the time property is rented or an undivided fractional interest in either. The present law allows each individual to transfer one personal residence to a Qualified Personal Residence Trust.

Are there tax benefits associated with a Qualified Personal Residence Trust?

There are several benefits associated with a QPRT. If the grantor survives the term of the trust, none of the residence value is included in calculating the estate value for federal estate tax purpose. The transfer of a residence to a QPRT is treated as taxable gift. The value is based on the present value of the beneficiary's right to receive the property at the end of the Qualified Personal Residence Trust term. Another tax benefit is that all of the future appreciation of the residence will be transferred to the children's estate and be free of gift tax. The QPRT is a powerful estate-freezing tool.

Is a Gift Tax Return required when a residence is gifted to a Qualified Personal Residence Trust?

Yes! A federal gift tax return, form 709 must be filed in the year in which the gift (residence) is gifted to the QPRT by the grantor.

What happens if the grantor dies before the term of the QPRT Expires?

If the grantor dies during the term of the QPRT, the residence is included in the grantors estate at the full market value as of his day of death. The benefit of creating a Qualified Personal Residence Trust is no longer available.

What if the grantor outlives the term of the QPRT and desires to continue living in the Residence?

If the grantor survives the term of the QPRT, the residence passes to the named beneficiaries. They become the owners of the property. The grantor can lease the property back from the beneficiaries at a fair market value rent and continue to live in the residence. The rent is paid to the beneficiaries and may be viewed as an opportunity to transfer additional assets to their children via the rent payment.