Qualified Personal Residence Trusts
A qualified personal residence trust (QPRT) allows you to transfer your residence to your children for less than full fair market value. The trust is structured so you to retain the use of the home for a term of years after which the end of the term the home is distributed to your children.
There are two beneficial interests in the trust, the “income interest” which is what you retain represented by the right to live in the home for a number of years, and the “remainder interest” represented by the value of home after you have lived in it for the full term of years you retained.
A QPRT only reduces the value of the home transferred to your children if you survive the term of years you retained; therefore, selection of the term of years is critical in this type of planning.
The value of the gift is the value of the property on the date of transfer to the trust, less the value of the right to live in the residence for the term of years. In addition, in most cases it is also best to retain the right to have the residence returned to your estate if you die during the trust term which further reduces the value of the property.
You can further retain the residence in the trust following the term of years (called a “drop down trust”) upon which you rent the property from the trust in order to continue living in the residence. If the drop down trust is structured correctly, the trust can be a grantor trust so that the rent payments are not taxable rental income (so essentially they are additional monies transferred to your children and they are not treated as gifts either).
Is a Qualified Personal Residence Trust right for you?
Other considerations when determining if a QPRT is the appropriate estate plan vehicle for you are:
- Whether you are in poor health.
- Whether the home is subject to a mortgage.
- Whether you intend to sell the home for a residence of lower value in the near future.
- If the residence is located on significant acreage ( i.e. more than a few acres).
- If the residence is used in a trade or business or rented for lodging or as a bed and breakfast.
- If you anticipate significant capital improvements to the property during the trust term.