Qualified Personal Residence Trusts FAQ
Q: What is a Qualified Personal Residence Trust?
A Qualified Personal Residence Trust (QPRT) is a way you can give your home away and live in it too. It involves transferring your home to another party (usually children) at a reduced transfer tax cost. The idea is that the value today of the right to receive $100 in 5 years, is less than the value of the right to receive it now. Under a QPRT, your home is transferred to the trust while you retain the right to live in the home for a specified period of time. After that period, you may have the home distributed to your children or to a trust for them. The gift of the home and its value is affected by when your children are entitled to receive the home.
Q: What happens if I die while I living in the home?
If this happens, the home will be included in your estate for federal estate tax purposes because you have the right to live in it at your death. Because the home would have been included in your estate if you hadn't made the transfer, there's really no effect if you die during the trust term. You're simply back where you started.
Q: Can I put both my principal residence and my vacation home in a QPRT?
Yes. Each taxpayer may have up to two QPRTs. Each QPRT may hold an interest in only one home. Therefore, if you wish to transfer your principal residence and a vacation home to a QPRT, you must create two separate trusts.
Q: Can my spouse and I transfer our home we own as joint tenants to a QPRT?
Yes, you can.
Q: Can I transfer my home and the entire large parcel of land to the QPRT?
The IRS will consider your residence to include land adjacent to the home to the extent such land is reasonably appropriate for the residence. The location, use, and size of the home will be considered in determining how much of the surrounding land may be transferred with the home to the QPRT.
Q: How long should I retain the right to occupy the home that is transferred to the QPRT?
The longer you retain the right to occupy the home, the smaller the value of the remainder interest transferred will be. However, if you die during this period, the home will come back into your estate for tax purposes. Thus, you shouldn't retain the right to the home for longer than your life expectancy.
Q: What if I want to sell the home transferred to the QPRT and move to another home?
You may sell the home. You must reinvest the proceeds in another home that will be owned by the trust and will be subject to the same trust provisions.
Q: What if the home is damaged?
You may repair the home, but the funds must be used to pay for the improvements within six months of the addition to the trust.
Q: Who can be the trustee?
You or a trusted friend can. As with other trusts, the document should provide for a successor trustee if you become incapacitated.
Q: Who pays expenses of maintenance, insurance, and real estate taxes?
You may pay them directly or transfer funds to the Trustee to pay them. However, you may only transfer an amount equal to six months of expenses to the Trustee.
Q: Can I claim the real estate taxes and other deductible expenses as deductions on my income tax return?
Yes, because the trust is a grantor trust, you are entitled to deduct the same expenses as when you owned the home.
Q: What can I do if I still want to live in my home at the end of the trust term?
You may enter into a lease with the remainder parties. The lease must be for fair market rent as if you were renting from a third party. If the remainder parties are your children, the rent you pay them will be another way of transferring funds out of your estate to them. However, the IRS will closely scrutinize this arrangement and the rent is taxable income to your children.
Q: Can I repurchase the home from the Trustee?
No, the trust must specifically prohibit the sale or transfer of the home to you or to your spouse either during the term of the trust or after.
Q: What should I consider in deciding whether to create a QPRT?
Many things. A QPRT can be an effective tool to transfer your home to loved ones. However, a QPRT is a technical document and should be carefully drafted by a qualified attorney to ensure that all of the requirements under the Internal Revenue Code are met.