Qualified Personal Residence Trusts (QPRTs, or "cue-perts") for Asset Protection, Estate, and Tax Planning
This is an irrevocable living trust used to hold real estate for a fixed number of years. After the term has run, it is distributed to the beneficiaries of the trust (which may and often should include other asset planning entities, such as another trust or a FLP.) It offers both asset protection and tax planning benefits:
- Because it is a transfer of the ownership of the property, a creditor going after this asset now needs to go from the debtor to the QPRT holding the real estate, providing asset protection;
- Because it is a transfer today, gift tax is assessed today (or rather, for this year). The value of the transfer above the annual limit will be subject to taxation.
- Because you are retaining the right to live in the home rent-free, the value of the home is reduced for gift tax purposes, sometimes by as much as half or more, and appreciation of the home will be tax-free to your beneficiaries;
- So long as the QPRT is completed before the year in which the trust creator dies (and, as above, the assets are then placed into a different asset protection entity), the QPRT assets will not be a part of the trust creator's estate and can skip the long process of probate;
- You will still be able to take property mortgage deductions and expenses associated with the home, and the trust can sell the property and reinvest the proceeds to purchase another property;
- Gifts granted through your estate to your family will hopefully be in a different year, reducing your estate's overall tax liability by taking care of one of the biggest gifts in a different year than your estate;
- You will get a second bite-at-the-apple, and use the annual gift limit for two separate years, both this year and the year in which your estate is probated, reducing your overall tax liability.
There is one aspect of the QPRT that some regard as a benefit and others a drawback:
- Because the QPRT is for a fixed term of years during which you live in the home rent-free, after the terms end the house is transferred to the beneficiaries of the trust and must be rented back. To circumvent this, when the QPRT is made the trust creator usually leases the home from the beneficiaries beginning when the QPRT expires, and the trust creator pays a fair rent. The idea of paying this rent is disfavored by some, but does present another opportunity to transfer assets to the beneficiaries, now as landlords taking rental income. This also allows for an income shifting opportunity from a higher-tax-bracket QPRT trust creator to a lower-tax-bracket QPRT beneficiary.
There are three downsides, all related to tax:
- Because the real estate is a gift within one's life, the trust beneficiaries will not receive a stepped-up basis under Internal Revenue Code Section 1014(a) that an inheritor would receive. (For an option that may allow stepped-up basis, consider having the QPRT name a SPA trust as its beneficiary.)
- If the property is mortgaged, only the equity you have in the home is gifted to the trust in the year of transfer—remaining mortgage payments are considered additional gifts to the trust beneficiaries at the time the payment is made. Essentially, this makes for a slightly more complicated tax return.
- In the event that you die during the term of the QPRT, the entire value of the home is brought back into your estate and the home must pass through probate. (This puts you in no worse a position than most of American homeowners, however, who did not plan to use a QPRT.)
To learn how a QPRT fits in your asset protection plan, please contact us today. To schedule an appointment, please fill out our Client Intake form.