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There are so many tools in the estate planning toolbox that most people do not know about. This is part of the reason engaging in estate planning as early as possible is so important. Take the time to explore your options and find out what arrangements work best for you, your goals, and your loved ones. Have you ever heard of, for example, a Qualified Personal Residence Trust? Do not feel bad if you haven’t! Most people fall into this category. A Qualified Personal Residence Trust, however, can have significant benefits and might be a great addition to your own estate plan!

What is a Qualified Personal Residence Trust?

A Qualified Personal Residence Trust (QRPT) is an irrevocable trust where a piece of real estate is transferred int other trust by the owner of the property, who will be the grantor of the trust. The grantor will then regain the right to remain in the home for a certain period of time. After this period of time has expired, the residence will then become the property of the trust beneficiaries. In this arrangement, there can be significant estate and gift tax savings, but specific requirements must be observed for these savings, covered under the Internal Revenue Code Section 2702 and corresponding regulations.

QRPTs are often used with second homes or as a means to transfer ownership of a residence while enjoying tax savings. Transferring a residence to a beneficiary can result in significant gift tax and a QRPT can avoid this. After the residence is transferred into the trust, the grantor has a “retained interest” in the home. After the expiration of the specified time period, the beneficiaries of the trust get a “remainder interest” in the property. The owner retains only a fraction of the property’s value and, thus, the value of the property gift stays below its fair market value. This, in turn results in a lowered gift tax liability.

When the residence is transferred into the QRPT, this transfer is treated as a currently taxable gift. The value of the gift, however, is based on the current value of the beneficiaries’ right to receive their interest in the property when the trust term ends. This means that the longer the term of the trust is, the more the gift will be discounted. Be careful in how long you set the term of the trust, however. If the grantor dies before the expiration of the trust term, the property held in the trust will be included in the taxable estate of the grantor at its date of death value. In other words, there would end up being no transfer tax savings. Should the grantor outlive the trust term, however, the value of the property will not be taxable upon the grantor’s death. The property would also get the added benefit of passing outside of the probate process.

Estate Planning Attorney

Confused? It’s okay! The team at Verras Law is here to help walk you through all of the estate planning tools that may best serve you and your goals. Contact Verras Law today.