Qualified personal residence trusts are not as popular of an estate planning tool as they used to be but in some circumstances they can still be used beneficially.
Due to relatively high estate tax exemptions and relatively low interest rates, qualified personal residence trusts have dropped out of favor in estate planning. They just are not as useful for as many people as they used to be.
However, people who expect to have estates with values over the estate tax exemption or who have homes that could rapidly rise in value can still benefit from a QPRT as long as everyone in the family is on the same page about what should happen to the home.
Recently, Barron’s discussed some of the benefits and drawbacks of QPRTs in “Holding Vacation Homes in Trust.”
A QPRT is an irrevocable term-limited trust that can help to stretch your gift tax exemption. When a residence is put into the trust the value of the residence is locked in for tax purposes.
The owner can still live in the home and is responsible for it. The residence can even be sold as long as another residence is then put in the trust.
When the term of the trust ends the trust beneficiaries become the new owners of the residence. However, if the current owner passes away before the term of the trust is over, the purpose of the trust is defeated and the home becomes part of the estate.
Major drawbacks of a QPRT?
Once the trust is ended the current owners can only continue to live in the home if they pay fair market rent and the trust beneficiaries who are the new owners are responsible for upkeep. Thus, if the beneficiaries are not financially independent and able to pay for upkeep, a QPRT is normally not a good option.
If the beneficiaries wish to sell the residence, they might have to pay more in taxes than if they had inherited the home through other means.
Consequently, a QPRT is only a good idea when the beneficiaries would like to keep the home.
Reference: Barron’s (Nov. 4, 2016) “Holding Vacation Homes in Trust.”
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