What Is a Qualified Personal Residence Trust and Can You Create One?

A qualified personal residence trust could help you limit estate and gift tax exposure while allowing you to live in your home for years to come. This estate planning device also passes on your house to your relatives or other beneficiaries of your choice.

How Does a Qualified Personal Residence Trust Work?

To create a qualified personal residence trust (“QPRT”), a homeowner transfers his or her personal residence to a trust specifically prepared to meet IRS QPRT requirements. The trust language states that the trust’s creator (the homeowner) retains an interest in the house for a set number of years. During that time, the homeowner can live in the house rent free. After those years pass, the house passes to designated beneficiaries such as children.

What Are the Tax Benefits of a Qualified Personal Residence Trust?

The main benefit of setting up a QPRT is reduction of gift or estate taxes. If a homeowner were to give his or her children the house directly, the IRS would assess gift tax on the transfer. Depending on the value of the home, this tax could be quite expensive. The situation is similar if the homeowner leaves the house to the children in his or her will.

Starting a QPRT can greatly reduce the potential gift or estate taxes. Basically, because the homeowner retains an interest in the home for a set number of years listed in the trust, the gift’s value is reduced by the value of that interest. As long as the homeowner survives past the set number of years, the gift’s value goes down and thus reduces the amount of gift taxes due.

Further, because the house gets transferred to the chosen beneficiaries, it is no longer part of the homeowner’s estate, which could reduce estate tax liability in the future. A smaller estate means less likelihood that the estate will owe taxes.

How Can You Get Started Making a QPRT?

There are many pros and cons to QPRTs beyond the scope of this blog. For example, the IRS has extremely strict requirements for what constitutes a qualified personal residence trust. You can only place your primary residence, as well as a small amount of cash to cover home expenses, in the trust. Any modifications to the house after the trust is created can affect the QPRT’s effectiveness too. As a result, you should consult a lawyer if you are interested in forming this kind of trust. With the lawyer, you can explore whether a QPRT is right for you.

Want to start planning your estate? Local attorney Andrew Szocka, Esq. provides thorough and speedy estate planning help in the Chicagoland area. To schedule a free initial consultation, visit the Law Office of Andrew Szocka, P.C. online or call the office at (815) 455-8430.

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