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Simple English definitions for legal terms
qualified personal residence trust (QPRT)
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A quick definition of qualified personal residence trust (QPRT):
A qualified personal residence trust (QPRT) is a type of trust that helps people reduce estate and gift taxes by moving their personal residences into a trust. The person who creates the trust (the grantor) transfers their home to the trust for a set amount of time while still living in it. After that time is up, the property goes to the beneficiaries. The value of the property for tax purposes is calculated based on the time the property was transferred to the trust, not when it was transferred to the beneficiaries. This can help reduce taxes because it freezes the value of the property at the time it was transferred to the trust, even if the property increases in value over time. However, there are some important rules that must be followed for a QPRT to work, such as the grantor surviving the trust and only transferring two personal residences to the trust.
A more thorough explanation:
A Qualified Personal Residence Trust (QPRT) is a type of trust that helps minimize estate and gift taxes by transferring personal residences into a trust. The grantor transfers a residence to the trust for a set amount of time while still living in the residence. After the time ends, the property goes to the beneficiaries. The value of the property for tax purposes is calculated based on the time the property was transferred to the trust, not when transferred to the beneficiaries. The value of the property is reduced by the grantor’s right to live at the property for the length of the trust.
For example, if a person transfers their $1 million home to a QPRT for 10 years and continues to live in the home, the value of the property for tax purposes will be calculated based on the time the property was transferred to the trust, not when transferred to the beneficiaries. If the person lives in the home for the entire 10 years, the value of the property will be reduced by the grantor’s right to live at the property for the length of the trust. If the home increases in value to $2 million during the 10 years, the beneficiaries will receive the home at the end of the trust for $1 million, and the grantor will have avoided paying taxes on the $1 million increase in value.
However, there are some important requirements for a QPRT to be recognized by the IRS. First, the beneficial tax treatment only occurs if the grantor survives the trust, and therefore, the trust cannot be a life estate nor can the grantor die before the trust ends. Second, the grantor can only continue living at the residence after the trust ends by gaining a fair-market value lease from the beneficiaries, as they now own the property. Thirdly, a person can only transfer two personal residences to a QPRT. Any commercial property or non-real property (e.g. fixtures and appliances) will not count. Lastly, there are some tricky generation-skipping tax (GST) rules that must be followed, such as the predeceased parent rule, which must be followed in order to maximize GST exemptions.