In the parlance of estate planning, a QPRT is a qualified personal residence trust, and they are used to remove the value of your home from your estate for tax purposes. Let’s say that you plan to leave your home to your daughter after you pass away. You place the house into the trust, and you name your daughter as the beneficiary. In so doing you have then effectively removed the value of the residence from your estate.

However, your day-to-day life doesn’t have to change at all. When you draw up the terms of the trust, you stipulate the period of time that you will continue to live in the home before it becomes property of the trust. You then proceed with life as usual; you pay no rent, but you are responsible for maintenance expenses and property taxes.

This transfer is considered to be a gift, and as such it is technically subject to the gift tax. But the IRS doesn’t use the fair market value of the home at the time of the transfer. The taxable value of the gift is reduced by your retained interest in the house. The longer you plan to live there, the greater your retained interest. By the time ownership of the house is transferred to the trust, the taxable value of the gift is going to be well below the true market value of the property. If you are going to live in the home for ten years, its taxable value will probably wind up being about half of its actual market value.

The lifetime gift tax exclusion is one million dollars. So, if the taxable value of the residence would up being less that this amount, the house will have changed hands free of the gift tax levy. And since it has been removed from your estate, if the remaining assets are less than the estate tax exclusion amount ($1 million in 2011) you are free of estate tax exposure as well.

In other words, you get to continue living in your house, but get its value, along with all of the future appreciation on it, outside of your taxable estate. If this sounds like something that would be appropriate for you, please call our office for an appointment.

Tags: Estate Planning, Inheritance Planning, QPRTs, Wills & Trusts