What is a Qualified Personal Residence Trust?
A Qualified Personal Residence Trust (“QRPT”) permits you to transfer ownership of your residence to your family during your lifetime but still retain the exclusive right to live in the residence, while reducing the size of your estate for estate tax purposes. This type of trust is specifically authorized by the Internal Revenue Code. The QPRT permits you to continue to enjoy your residence, knowing that the value at the date of death will not be included in your estate. This is one type of estate planning service we provide at Peterson Law Group.
How a Qualified Personal Residence Trust Works
The residence is transferred to the Qualified Personal Residence Trust for a designated initial term of years (for example, 20 years). If you live longer than the initial term, ownership of the residence will be transferred to your family at a fraction of its fair market value. If you die during the initial term, the property will be brought back into your estate, but you will be no worse off than had you not created the QPRT.
During the initial trust term, you have the absolute right to remain in the home rent free. After the initial term, you can be granted the right to rent the home for the balance of your lifetime for its fair rental value.
During the initial trust term, you can be the sole trustee or a co-trustee of the trust with complete control over all decisions of the trust and over all of the trust's assets. You can also sell the residence and buy another property.
Qualified Personal Residence Trust Limits
There is a limit on how many QPRTs you can create. Currently, you may transfer up to two (2) personal residences into Qualified Personal Residence Trusts. The QPRT is a helpful estate planning tool to reduce federal estate taxes because it permits you to transfer a residence out of your taxable estate while retaining the right to use it during your lifetime. The gift for federal gift tax purposes is based upon IRS published interest rates at the time of the transfer. This rate does not take into consideration appreciation in the value of the property. Thus, these trusts are particularly useful to transfer real estate which are expected to increase a lot in value.
Qualified Personal Residence Trust Tax Treatment
Because the QPRT is a “grantor trust” under the income tax laws, you are treated as the owner of the property for income tax purposes while the QPRT is in effect. Therefore, all of the QPRT's income, gains, losses, and deductions are included on your personal income tax return. For example, the deduction for real estate taxes paid can still be claimed on your personal tax return. In addition, favorable capital gains treatment, including capital gain rollover, and the exclusion of gain for selling a personal residence are still available to you. Your estate planning attorney can walk you through your options.
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College Station TX 77840
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Kingwood, TX 77345
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