A Qualified Personal Residence Trust (QPRT) is a gifting strategy that allows you to give away your personal residence or second home to your children or a charity, while continuing to have the right to live in the home.
If structured properly, a QPRT can substantially reduce the amount of tax due on the transfer of the home. Why is this useful? Consider this simplified example. A mother’s home is valued at $500,000. When the mother is 65 years old, she transfers her home to a QPRT. She sets the term of the QPRT for ten years. At the end of the trust’s term, the ownership of the home passes to her children at a substantial tax savings.
Once the ownership has transferred, the mother decides to rent the home from her children which may allow her to transfer additional wealth to her children in the form of rent.
Property Value $500,000
Grantor Age 65 years
Trust Term 10 years
Federal Rate 8%
(IRC Sec 7520)
Value of
Taxable Gift $170,600
Notice, the home value used to calculate tax is $500,000. This is the home’s value at the time the QPRT is created, not the home’s value at the mother’s death. In the absence of a QPRT, the home’s value would be determined at the time of the mother’s death (or at a later alternate date).
If the mother’s home is worth $500,000 today, in ten years, at 8 percent appreciation, the value of the home would exceed $1,000,000. Taxes would be based on this higher amount.
In this example, by using a QPRT, the mother 1) gave her home to her children, 2) used and controlled her home rent-free for an additional 10 years, 3) reduced the size of her estate by $1,000,000, and 4) used only $170,600 of her applicable gift tax exclusion.
About the Author
Kimberly Jean Brown is an attorney and the creator of the Truth About Estate Planning, a free workshop on estate planning strategies. Visit www.ProtectingLegacies.com for more information.
Circular 230 Notice: To ensure compliance with requirements imposed by IRS, we inform you that any US tax advice contained in this communication is not intended or written to be used and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code, or promoting, marketing or recommending to another party any transaction addressed herein. This article is for general information only; nothing should be taken as legal advice for any individual case or situation.
