A qualified personal residence trust (QPRT) places a residence in a trust either for the benefit of one’s spouse and children or for a charity. This type of trust was created and passed by the US Congress in 1990, when concerns arose about inheritors of a house having to sell gifted property because they couldn’t pay the taxes when ownership was transferred to them. A qualified personal residence trust can apply to a primary or secondary residence and can significantly decrease taxes at the time that the residence is inherited.
The trust is created and controlled by the homeowner-grantor but the title to the residence is transferred to the QPRT. This transfer involves an agreement about how long the owner may continue to reside in the house even though the residence has been transferred to the trust. The grantor-trustee may continue to reside at the residence for a term of years specified in the qualified personal residence trust. During the grantor's stay he or she is not required to pay rent but is responsible for related expenses (e.g., maintenance and estate fees) and may claim associated tax deductions. If the grantor wishes to extend his or her stay past the predetermined term of years the grantor will have to pay fair market rent.
Since the gift is not transferred immediately its value is not equal to the value of the residence at the time the QPRT is created. Rather the value of the gift is based on the value of the future right to own the residence at the end of the specified term of years. This may make the gift value as much as 25-50% lower than the actual retail price of the house at the time of the transfer.
When the specified time period has run, the homeowner-grantor's tax liability is for the value of the gift not for the value of the home. Normal estate taxes will not apply. In this way, the qualified personal residence trust can provide for a significantly lower tax. It also means that a single inheritor is more likely able to take possession of the home without having to sell it to pay the applicable taxes.
The qualified personal residence trust has specific guidelines, which may make choosing this type of trust more or less attractive. If the original owner of the house dies prior to the end of the term of occupancy, the home is considered part of the estate, meaning normal estate taxes will apply as if no QPRT had ever been made. Inheritors will not be able to claim reduced value of the home and they will be responsible for the tax on the total value of the home.
The grantor cannot mortgage or refinance the house since he or she no longer owns the property — the trust does. Additionally, when the stated term of residence is up, the occupant has to vacate or pay rent to the beneficiaries who are now the lawful owners of the residence. To cause the least hassle, specific legal agreements should specify the occupant’s legal right to stay in the home once the occupancy period is over. Further, the deferment period of ownership should be considered. Though longer occupancy means the gift has less value, this can mean virtually nothing if the occupant dies before the term of occupancy is over.
If the qualified personal residence trust involves a home that is mortgaged, and the occupant cannot make the mortgage payments, problems can occur. In other cases, all parties may have to agree to sell the home, thus canceling the trust.
The qualified personal residence trust has some terrific advantages. Since the grantor no longer owns the house, no fines, fees or bills can be levied against that person’s portion of the estate. It can protect older men and women who might suffer a catastrophic illness and have huge hospital bills. The hospital cannot demand any money that might be achieved by refinancing or selling the house, since the occupant does not have any right to that money. Any collections may, however, be levied against the rest of the occupant’s estate.
Even if the occupant accrues debts, he or she is assured occupancy of the house until the end of the stated occupancy time as set by the trust. The altruistic goals of the elderly being assured a home and of inheritors not having to pay huge taxes on small inheritances are offset by the significant tax break the QPRT gives to the rich. Some argue that QPRT laws are simply tax loopholes for those with significant property values. Critics further add that creating such trusts actually deflates state and federal budgets, since inheritance tax is collected at a much lower rate than usual.