QUALIFIED PERSONAL RESIDENCE TRUST (QPRT)
A qualified personal residence trust (QPRT) can be one of the most effective estate planning techniques available to wealthy families. A QPRT allows an individual to make greater use of their $12,920,000 lifetime exemption from gift and estate tax. It is a particularly attractive technique for individuals who are already maximizing their $17,000 annual exclusion gifts to family members. Moreover, with a QPRT, an individual may make a significant gift to their loved ones without adversely affecting their income.
Using a QPRT, an individual may put a primary residence or vacation home in trust for the benefit of a beneficiary (their children or a loved one), while retaining the right to use the residence for a specific term of years. Each individual may create up to two QPRTs. For gift tax purposes, the value of the beneficiary’s remainder interest is determined after subtracting the value of the grantor's right to use the residence for the term of years. This valuation procedure allows a grantor to substantially discount the value of the gift made to the beneficiary, and also removes all post-gift appreciation in the value of the residence from the grantor’s estate. Assuming that the grantor survives the trust term, the residence either passes outright to the beneficiaries of the trust or can remain in trust for their benefit. Essentially, a successful QPRT allows a grantor to reduce the gift or estate tax cost of transferring a residence by leveraging the $12,920,000 lifetime gift and estate tax exemption.
The length of the grantor’s term interest in the trust is not limited and the longer the term interest, the lower the value of the beneficiary's remainder interest (and, hence, the lower the gift tax). The term interest should be kept short of the grantor’s life expectancy, since if the grantor dies before the termination of the term interest, the full value of the residence would be included in the grantor’s estate for estate tax purposes, while the earlier taxable gift is removed (thereby defeating the purpose of the trust). Essentially, though, a QPRT is an estate planning technique with virtually no downside estate planning risk.
Although the QPRT is irrevocable once created, the trustee retains the power to sell the residence and purchase a new one. Accordingly, the grantor's ability to change residences is not hampered by the use of a QPRT. If the residence is indeed sold during the trust term, the sale proceeds must be reinvested in a new residence within two years, or the QPRT will either have to (i) terminate and distribute assets to the grantor or (ii) convert to a grantor retained annuity trust (GRAT).