The lackluster real estate market and temporarily high gift-tax exclusion offers a unique estate planning tool: the QPRT, Qualified Personal Residence Trust. Here is how the QPRT works:
- Each spouse puts his/her half of the house into a QPRT benefitting their children.
- Each spouse takes back the right to occupy the house rent-free for a period of years.
- The value of the gift for gift tax purposes is marked down because each half doesn’t have full control over the property, the sons won’t be able to use the property for ten years, and if either parent dies before the expiration of ten years, his/her share goes back into his/her estate
- If both spouses survive the ten years, the property transfers to the trusts, and the spouses pay rent. Since the rent payments are mandatory, they are not taxable gifts and thus are another estate tax saving opportunity.
The lower real estate values, and the temporary increase in gift tax exclusion, have made the QPRT an increasingly popular estate planning strategy.
Using QPRTs triggers the immediate payment of gift taxes, so they may not as useful for primary residences or the most valuable property in someone’s estate.
A QPRT is not for everyone, there are downsides that must be evaluated, among them:
- If you children sell the home after you are gone, there may be substantial capital gains tax consequences,
- Selling a home in a QPRT is a complex, and messy undertaking,
- When the QPRT terms ends, you have to give up the house (or pay rent).
For more information on QPRTs, read the recent Wall Street Journal Article, A Matter of Trust: Giving Away a Home.