What is a Qualified Personal Residence Trust?
Estate planning in Nevada does not need to be a complicated process. Still, there are many choices for you to look at when deciding how to handle the ownership of your property now and in the future.
One option that is available to you is a Qualified Personal Residence Trust (QPRT). Read below to find out what this is, what the process for creating one is, and how it could help you and your beneficiaries.
What is a Qualified Personal Residence Trust?
A QPRT can be a useful tool during the estate planning process. While they seem to be declining in popularity and use, the purpose of a QPRT is to let a homeowner transfer their home or secondary residence to a trust, but still maintain the right to live in the home for a set amount of years. This time limit is usually called the “retained income period”.
A QPRT is an irrevocable trust. This means that once it is created, it cannot be changed, canceled, or even modified.
When a QPRT is created, the property is essentially removed from the remaining estate. This reduces future tax burdens to any beneficiaries of the estate by lowering the calculated amount of the total estate. It essentially creates a gift of the property to your future beneficiaries.
What are the Pros and Cons of a Qualified Personal Residence Trust?
Irrevocable trusts like the QPRT always come with both pros and cons. Many of the positives and negatives concerning QPRTs focus on different tax exemptions and breaks. This can be complicated to sort through.
Meeting with an experienced trust lawyer will help you understand all the pros and cons of a qualified personal residence trust and then decide if this type of trust is right for you and your estate.
Pros of a Qualified Personal Residence Trust
- The main purpose of a QPRT is to reduce the size of a taxable estate. It removes the primary or secondary residence from the final total of the estate. It also removes any appreciation of the property from the estate. This means that your beneficiaries will be taxed less and be able to gain more from your estate.
- Another main benefit of the QPRT is the fact that you, as the estate holder, can still use either the primary or secondary home. You do not forfeit the right to live in the home and you may continue to live there rent-free. As a resident, you can also profit from any tax deductions associated with living in and owning the home.
- A QPRT is a smart move if you have a property that you want to keep in the family. This type of trust encourages your beneficiaries to keep the property as family ownership rather than sell it off after you are gone.
- There are other tax benefits that you can benefit from by creating a QPRT. It may help reduce both gift taxes and estate taxes. To be able to claim any exemptions, the value of your home will need to be significant. If you do qualify, you may be able to lock in the value of your house at a higher rate and your beneficiaries will not need to worry about property depreciation at the time of your death.
Cons of a Qualified Personal Residence Trust
- The largest con of a QPRT is the fact that it is irrevocable. Once it is made, it is difficult to modify or cancel. This means that you will more than likely not be able to sell the house regardless of possible future situational changes. There are few exceptions to this and generally, the only things that end a QPRT are either death or the end of the term of years that was specified in the trust.
- QPRTs have a set amount of years included. You are allowed to live in the home rent-free until this time has passed. If you are still living, the ownership of the house will pass to the heirs and beneficiaries named in the trust. You can still live in the home, however, you will be required to pay fair market rent to the new owners.
- If you decide to sell the property after the end of the retained income period, you will owe any capital gains taxes. These are calculated by comparing your income tax bracket at the time of the creation of the QPRT to the price of the sale of the property.
- There are consequences if you pass away before the end of the retained income period. Mainly, the QPRT is void and the value of your primary or secondary residence will be included in your final taxable estate total. The worth of the property will be determined by fair market value at the time of your death and not at the time the QPRT was created.
What are the steps to create a Qualified Personal Residence Trust?
The first step is to create a written QPRT agreement. This needs to include the names of your beneficiaries who will gain ownership. You also need to decide the retained income period. Remember, this means you can live in the house rent-free but all benefits are lost if you pass away before the retained income period has ended.
After you have written the trust, you need to transfer ownership of the property into the name of the QPRT. To do this, you will need to record a new deed that transfers it from your name to the name of the trust. This essentially funds the trust with the residential property.
Next, you need to get an appraisal of the residence from the date you transfer ownership and record the new deed. The purpose of this is to establish the worth of the home at the fair market value at the time the trust was made for gift tax purposes.
The final step is to then file the trust with the IRS. There are several forms involved in this process and a knowledgeable trusts and estate attorney can walk you through them.
Speak with an Estate Planning Attorney Today
If you have additional questions about QPRTs, schedule a free consultation with our estate planning attorneys in Las Vegas. We can help you decide if this type of trust is right for you and your estate planning goals.