What is a Qualified Personal Residence Trust?

One of the most valuable assets is your residence.  If you are considering estate planning, you may already be aware of different types of trusts that are available.  An important type of trust for protecting your personal residence is referred to as a QPRT, which stands for Qualified Personal Residence Trust.  When created properly, a Qualified Personal Residence Trust can provide a wonderful benefit to you and your family.

How the Qualified Personal Residence Trust works

A Qualified Personal Residence Trust is designed to hold your primary or secondary residence in an irrevocable trust so that, upon your death, the value of your residence will not be included as part of your taxable estate.  If established correctly, you will be able to use your residence for a specified period of time (retained income period).  When that period ends, your residence will be transferred to your final beneficiaries, whom you name in the QPRT.  Because you will no longer have ownership rights in the residence after the retained income period expires, estate taxes can no longer be assessed against that residence.

Steps required to create a Qualified Personal Residence Trust

Creating a Qualified Personal Residence Trust requires just a few steps.  First, an irrevocable trust agreement is drafted, which will specify both your initial and successor trustees.  Your trust agreement will also indicate the amount of time you wish to retain the right to live in the residence, which is referred to as the “retained income period.”  Since a Qualified Personal Residence Trust is irrevocable, these provisions are extremely important, as they cannot later be modified.

The next big step is to fund the trust.  This is accomplished by transferring your residence to the trust; in other words, executing a new deed to the residence, in the name of the trust.  Before this can be done, you will be required to obtain a recent appraisal of your property, in order to determine the current value of the residence.  This is required for gift tax purposes.  Establishing the fair market value of your residence is necessary for you to report your gift of the property to the IRS.

The final step involves transferring ownership of your residence to your eventual beneficiaries.  When the retained income period ends, the trustee must transfer ownership of your residence from the name of the trust to the names of your final trust beneficiaries.  A new deed will be recorded in the land records where your residential property is located.  You can still live in the residence after the retained income period ends, as long as you pay fair market rent.  This will also help to further reduce your taxable estate, allowing you to pass more of your assets on to your beneficiaries, without depleting your annual gift tax exclusion.

State and federal estate planning laws often change, so be sure to consult with an estate planning attorney for the most current legal advice regarding Qualified Personal Residence Trusts.  If you have questions regarding a trust, or any other estate planning needs, please contact Wilcox Attorneys, PA online or by calling us at (479) 443-0062.