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The Sixth Circuit holds that the district court lacked statutory authority to amend a restitution order for elder financial abuse, even though the financial abuser was the deceased victim's sole beneficiary and would therefore receive the funds. In United States...
READ MOREA roundup of elder law news and practice development articles culled from news sources across the nation during the week of August 27, 2024, to September 3, 2024.
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FROM THE KNOWLEDGE BANK
A qualified personal residence trust (QPRT) is an irrevocable trust used to achieve estate and gift tax savings. The basic idea behind a QPRT is to transfer the equity in a qualified residence out of a person’s estate and to their heirs while reaping lower transfer tax consequences.
A QPRT can also be used to prevent creditors from accessing equity in the residence and allow for the gradual transition of assets to other family members, should these be among a person’s concerns. Assuming specific rules are met, a QPRT can be used for a primary residence or secondary residence, such as a vacation home.
If, after consultation with an attorney, it appears a QPRT could benefit you, it works as follows:
A QPRT must follow specific rules to comply with limitations imposed by the IRS:
It should be noted that the above rules are not exhaustive. There are many other rules and technicalities that are beyond the scope of this article.
A QPRT has unique gift tax benefits. Once set up, the trust grantor is treated as having made an immediate gift to their beneficiaries. This means that the gift tax value is calculated as of the time of the transfer of the property into the QPRT.
However, this gift is discounted by the amount of the trust grantor’s retained interest in the residence. This is usually the value of the right to use or collect income from the property. The values and discounts are determined using actuarial tables published by the IRS.
Once the trust term ends, and assuming the grantor survives the term, the residence will pass on to the beneficiaries. They will not pay any further transfer tax above any tax that may become due on the discounted gift amount. If the residence has appreciated in value during the trust term, this appreciation will not be subject to transfer tax.
If the trust grantor passes away before the expiration of the trust term and there is a reversion clause, QPRT property will be brought back into the grantor’s estate. In this scenario, the grantor will not be in any worse position than they would have been had they not created the QPRT.
Many become nervous when they learn that they may only retain an interest in a personal residence subject to a QPRT for a certain amount of time.
However, one way to continue to have access to the property even after the term ends is to provide that the residence will stay in the trust and give the person’s spouse the right to live there rent-free until they pass. As long as the grantor remains married to their spouse, there is no reason why they cannot live there as well during this time.
QPRTs are not a perfect solution for everyone. For example, it will not be possible to mortgage the property after it is put into the trust. In addition, it may be necessary to pay off any mortgage against the property prior to the transfer to avoid complications, such as a possible mortgage acceleration or other difficulties.
Setting up a QPRT can also be an expensive endeavor, as a good amount of time and effort by qualified professionals will be required to set it up correctly. This can include attorney’s fees, several appraisals, and title expenses.
Finally, a QPRT is irrevocable and may not allow someone to engage in other gift and estate tax planning. An analysis will have to be made to determine if a QPRT makes the best use of a person’s available gift and estate tax exclusions.
This article only covers some of the rules that must be followed or technical considerations that should be considered when setting up a QPRT or determining if it is the right option for your situation. It is essential to consult with a qualified estate planning attorney in your area before creating a QPRT.
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