Qualified Personal Residence Trust

For those with significant assets, a way to reduce federal estate taxes is with a Qualified Personal Residence Trust (QPRT). These trusts allow homeowners to give a principal residence or vacation home as a gift to a trust established for a specific term. Legally speaking, the homeowner transfers a remainder interest in the house and continues to live there for a set number of years.

 

Suppose you want to pass on your home, currently worth $500,000, to your children. You also plan to retire in ten years at age 70 and move out of state. Rather than give them the house when you retire and incurring hefty gift taxes on its appreciated value, you can, in effect, give it to them now.

 

By placing your home into a QPRT, you may be able to remove it from your estate -- thereby avoiding future estate taxation. You live in the house during the ten years, then ownership passes to your children. Since your kids must wait a decade to receive the property, the IRS discounts the value of the gift they are getting. Thus, the house would be considered a gift of approximately $242,000 (the present value of $500,000 using a 5.6% applicable federal rate). If the house appreciates during the decade, the trust will produce bigger savings since it freezes the value of the children's interest at $242,000. These trusts have their drawbacks, however. If you die before the trust expires, the house is kicked back into your taxable estate at its full date-of-death value. If you move or sell the house before the end of the trust term, you may also lose the tax advantages if the house is not replaced within certain time constraints. 

This is a FREE service to you.

Why PlannerConnect? Create A Financial Plan