By Julie Malekhedayat, CPA, Principal
ASL Family Wealth & Individual Tax Group
Qualified personal residence trusts (QPRTs) are an estate planning technique that can provide both tax and non-tax benefits to certain taxpayers looking to gift a principal residence, second home, or vacation home slowly over a number of years using a discounted gift value. However, before entering into a QPRT, you should consider the advantages and disadvantages in order to determine if it is right for you.
What is a QPRT?
A QPRT is a special kind of trust created for a specified number of years, where a taxpayer gifts a personal residence to the trust and retains the right to use the residence during the trust term. The gift is valued at the discounted present value of the residence using IRS tables, taking into consideration the value of the taxpayer’s retained right to use the residence. So the longer the period of the trust, the greater the discount, and smaller the gift. The goal of this discounted transfer value is to minimize the gift size in order to use less of your lifetime estate and gift exemption amount. At the end of the trust term, ownership of the residence transfers to the beneficiary of the QPRT.
Who Should Have a QPRT?
Typically a QPRT should be implemented by a taxpayer with a taxable estate. In 2016 this applies to each individual taxpayer with an estate in excess of $5,450,000. A QPRT works best when the overall taxable estate can be reduced, saving a 40 percent estate tax. However, the trade-off if a QPRT is successful (i.e. the grantor has survived the length of the QPRT term) is that there is no step-up in tax basis at death on gifted assets, so if the property were sold there could be a taxable capital gain. One caveat is that if the grantor died before the end of the term of the QPRT, no transfer would take place and the residence would still be included in the taxpayer’s estate for estate tax purposes.
A QPRT works well for taxpayers who have children, are likely to be subject to the estate tax, and have a desire for the residence to be retained in the family for several generations.
The benefits of Proposition 13 for California property taxes will not be lost when the residence is transferred to the QPRT and ultimately to the children.
A QPRT may provide a degree of protection from the grantor’s creditors.
With the IRS discount rates at historic lows, the amount of discounting available in the QPRT transfer is less than when rates are higher. This, coupled with the lack of a step-up in tax basis, may make a QPRT less attractive.
In the right circumstances, a QPRT may provide both a reduced estate tax bill and the ability to keep a special residence in the family for multiple generations. If you are interested in learning more about QPRTs or have questions about any other estate and trust matters, please feel free to contact us anytime. We’re happy to help.