What to know about a Qualified Personal Residence Trust (QPRT)

By Amy Piedmont, J.D., LLM, Vice President, Sr. Trust Relationship Manager and
Katherine “Kate” Gambill, J.D., Vice President, Sr. Trust Relationship Manager
Synovus Trust Company, N.A.

In our series, “The Personal Trust Corner: A J.D.’s Perspective,” we aim to spotlight one planning strategy each month in response to the ever-changing Estate Tax Laws. This month, we turn the spotlight on the Qualified Personal Residence Trust (QPRT). A QPRT is a powerful financial tool that allows homeowners to transfer the title of their primary residence or vacation home into an irrevocable trust. This strategy presents a multitude of benefits, primarily in terms of estate planning and tax savings. This month we will delve deeper into the specifics of a QPRT, including its foundation, how it works and the tax implications.

What Is a QPRT?

A QPRT is a trust designed to allow the grantor/homeowner to gift his residence to an irrevocable trust while providing him with a retained use of a personal residence. If the homeowner is married or has a dependent, the trust may provide for their occupancy as well. When the property is transferred into a QPRT, the value of the grantor’s home, including any future increase in value, is no longer part of his total estate. It's like placing your house in a safe while holding the key to it for a certain period.

While a QPRT can be a powerful tool, there are a few rules to keep in mind. First, the Trust must be irrevocable, meaning it can't simply be dissolved it if the Grantor’s circumstances change. Second, if the home is sold, it will no longer be a QPRT. However, the trustee can reinvest the sales proceeds into a new residence to maintain the QPRT status.

Laying the Foundation of a QPRT

Setting up a QPRT involves following specific rules set out by the IRS. The Grantor forms an irrevocable trust where they can continue to use the residence rent-free and pay for mortgage expenses, real estate taxes, insurance and upkeep expenses during the trust's initial term.

They can also deduct these expenses for income tax purposes. At the end of the trust term, the residence either passes outright or in further trust to the remainder beneficiaries. The residence should primarily be used as the grantor's residence when occupied by him or her to qualify as a personal residence.

This IRS-approved instrument is an exception to the general rule that prohibits Grantors from using or enjoying property that qualifies as a gift. To adhere to IRS regulations, the trust term is set for a specific period, ideally shorter than the owner's life expectancy. Upon the term's end, the title is transferred to the trust beneficiaries. If the owner wishes to continue living in the home, they start paying fair market rent to the beneficiaries, which are not classified as taxable gifts.

If the homeowner passes away during the trust's term, the entire value of the home is included in the homeowner's estate for tax purposes. However, if the homeowner survives the term of the trust, the home's value is not included in the estate, potentially saving a significant amount in estate tax liability. It is important to note that the trust cannot be terminated early by the remainder beneficiaries buying out the grantor's interest.

One of the main benefits of a QPRT is that it allows the Grantor to freeze the value of his home at the time you move it into the trust. Any future appreciation of the home's value won't increase the Grantor’s taxable estate. Think of it as locking in the price of a stock before it rises.

Also, the IRS offers a unique benefit to QPRTs. Even though the Grantor is technically gifting his home to the trust, he still has the right to live in it rent-free for a specific period. This period is typically shorter than the Grantor’s life expectancy. After this term, the title of the property is transferred to the trust beneficiaries. If the Grantor chooses to continue living in the home, he will pay rent to the beneficiaries, further reducing his taxable estate.

Further, the QPRT is a smart way to reduce the value of your estate for tax purposes. When the home is transferred into trust, it's considered a gift. But instead of the gift being the full value of the home, it's only the estimated future value of the home when it eventually passes to the beneficiaries. This estimation is done using IRS mortality tables and the Sec. 7520 rate in effect. Interestingly, a higher 7520 rate corresponds to a lower gift value, resulting in potentially higher estate tax savings. This estimated value is usually much less than the current value of the home, resulting in a lower taxable gift.

A QPRT is treated as a grantor trust for income tax purposes, allowing the grantor to deduct expenses such as mortgage interest and real estate taxes. The capital gains exclusion available upon a sale of a residence by an individual is available for the sale of a personal residence held by a QPRT. However, the IRS has determined that the governing instrument for a QPRT must prohibit the sale or transfer of the residence to the grantor, the grantor's spouse, or to an entity controlled by the grantor.

Conclusion

Residential real estate is often a sizable portion of a high-net-worth individual’s estate. When individuals have a goal of keeping the property in their family, and the real estate is expected to increase, parting with these assets can lead to substantial estate tax savings. For these clients, a QPRT may be the perfect solution for reducing their estate tax liability and ensuring their residence or vacation home passes to future generations. However, to ensure these goals are accomplished, QPRTs demand careful consideration and strategic planning. At Personal Trust, our commitment is to guide you through this intricate landscape, with a goal  of ensuring the best possible outcomes.

Please reach out to our Senior Trust Relationship Managers: Amy Piedmont, J.D., LLM, Vice President, in Pensacola, Florida and Katherine Gambill, J.D., Vice President, in Atlanta with any questions or to start a conversation regarding estate planning. We welcome the opportunity to introduce you to how Synovus Trust Company can serve your needs.