Qualified Personal Residence Trust (QPRT)
A specific type of trust that allows its creator to remove a personal home from his or her estate for the purpose of reducing the amount of gift tax that is incurred when transferring assets to a beneficiary. Qualified Personal Residence Trusts allow for the owner of the residence to remain living on the property for a period of time with ‘retained interest’ (by and large greater than 0%) in the house; once that period is over, the interest remaining in the premises is transferred to the beneficiaries as ‘remainder interest.’
Depending on the length of the trust, the value of the property during the retained interest period is calculated based on Applicable Federal Rates provided by the IRS. Because a fraction of the value is retained by the owner, the gift value of the property is lower than its fair market value, thus lowering its incurred gift tax. This tax can also be lowered with a unified credit.
BREAKING DOWN ‘Qualified Personal Residence Trust – QPRT ‘
Generally speaking, a QPRT is useful when the trust expires prior to the death of the grantor. If the grantor dies before the term, the property is included in the estate and is subject to tax. The risk lies in determining the length of the trust agreement coupled with the likelihood that the grantor will pass away before the expiration date. Theoretically, longer-term trusts benefit from smaller remainder interest given to the beneficiaries, which in turn reduces the gift tax; however, this is only advantageous to younger trust holders who have a lower possibility of passing away prior to the trust end date.