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Qualified Personal Residence Trusts

A Qualified Personal Residence Trust (QPRT) is a special type of irrevocable trust that provides asset protection and reduces your estate tax liability. Qualified Personal Residence Trusts allows you to gift your home to your heirs while still living in it rent free for a specific period of time. You can be both a beneficiary and trustee of a Qualified Personal Residence Trust, as long as it does not exceed your life expectancy predicted by the I.R.S.

Once the term of years (your estimated life expectancy) expires, the QPRT names a beneficiary and trustee. If you are married, this is typically your spouse; otherwise, it can be children or other loved ones.

If you die prior to the term of years, the named trustee and beneficiary takes over. If you are still alive after the term of years expires, you can still live in your home.  

Advantages of Qualified Personal Residence Trusts

Other benefits of a QPRT include:

  • It is a grantor trust for income tax purposes. In other words, it typically does not file a tax return until you die or your term of years expires.
  • You can preserve the capital gains exemption ($250,000 per person/$500,000 for a married couple) and income tax deductions. You also may continue to deduct mortgage interest and property taxes.
  • If the I.R.S lowers the amount of the lifetime gift exemption after you create the trust, you will have already gifted the property at the higher rate, so will not have to worry about the reduction.
  • The QPRT transfers your residence outside of your taxable estate, thus removing the value of the home from the estate taxes paid upon your death. Additionally, all future appreciation in the value of your residence is also excluded from your taxable estate.
  • Further, you may pay rent after the term of years expires, which further decreases your taxable estate and allows you to “gift” additional money to your heirs that way.

Disadvantages of Qualified Personal Residence Trusts

Although there are many benefits of a QPRT, there are also some disadvantages:

  • As noted above, a QPRT is a type of irrevocable trust. This means that once the trust is finalized, you cannot change the beneficiaries.
  • There is no step-up in the residence’s tax basis with the exception of limited circumstances.
  • Only one property is allowed in the QPRT.
  • You cannot rent out the property to others (an LLC is better if you want to be able to rent your residence, but it comes with significant disadvantages).
  • If you are single, you cannot continue to be the trustee or beneficiary after your term of years expires. This does require a degree of trust in your beneficiaries and trustee.
  • The expense of creating the trust, deeding the property and obtaining an appraisal are incurred.
  • You are making a gift and therefore your residence must be appraised.

Common Questions Regarding Qualified Personal Residence Trusts

The following are common questions and answers clients have about QPRTs:

  • What happens if I want to sell my residence? The proceeds from the sale of your residence is deposited into the QPRT. Your QPRT then purchases the replacement residence. 
  • Can I rent out my house as a vacation rental or only a portion of my residence, such as a casita or garage, if it is owned by a QPRT? No.  A QPRT cannot own an income producing property.  This is a significant disadvantage to a QPRT.  Rather than sell your residence, you may buy a new residence and transfer the existing residence into a LLC where it may be rented.
  • What if I buy a replacement home for less than what I sold my old home for?  Any excess funds from the sale of the residence must be withdrawn from the QPRT within two years from the sale of the residence.
  • Is it possible to change the trustee of the QPRT? Yes.
  • Can I be kicked out of my house once my life expectancy expires? No.  The way we create the QPRT enables you to always be able to rent your residence after your life expectancy if such should be necessary.
  • If I am married, do we each need a QPRT? Yes, if both spouses own the residence.  If only one spouse owns the residence, only one QPRT is needed.

Choosing Skabelund PLLC for Your Qualified Personal Residence Trusts

Typically your residence is the most important asset you own.  You and your family’s roots are established where you live.  Neighbors, friends, schools, etc. all revolve around your residence.  However, protecting your residence is one of the most complicated assets you own.  At Skabelund, PLLC, we offer many forms of asset protection for your residence, including Qualified Personal Residence Trusts. Please feel free to fill out our contact form or call us at 480-323-9100 if you have any questions about asset protection.

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