Homeowners who want to minimize their future estate taxes and transfer their home to their children might consider setting up a Qualified Personal Residence Trust (QPRT). QPRTs allow the grantor to remove their personal home from their estate by gifting the home to the trust while retaining some interest—usually living in the home—for a specified number of years. Once that term ends, there are several implications for both the grantor and the beneficiaries, which are usually the grantor’s child or children.
Assuming that the grantor, the original homeowner, outlives the term of the QPRT, there are two options when it comes to handling the expired trust:
- Within 30 days after the end of the QPRT the trust must terminate
- Convert the QPRT into a grantor retained annuity trust (GRAT) through conversion of the term interest into qualified annuity interest
In either case, the end of the QPRT means that the title of the personal residence is transferred to the beneficiaries of the trust.
While the beneficiaries are not allowed to sell or transfer the personal residence back to the beneficiary at any point, the grantor can continue to live in the residence if he or she leases the residence from the beneficiaries at fair market rental value. This creates rental income and rental expenses for the beneficiaries, which will be recognized on their own individual tax returns. Paying rental income to the beneficiaries further facilitates transferring wealth to the next generation without incurring estate or gift tax.
QPRTs are only effective if the grantor outlives the expiration of the QPRT. If the grantor dies before the term is up, then the home is included in the grantor’s estate and no benefit is realized.
If you are in the process of estate planning or have questions about QPRTs, contact John Ure or one of our experienced estate tax advisors today at 301.231.6200.