Qualified Personal Residence Trust (QPRT)

This trust is typically used to remove the residence from the estate upon the owner’s death and thus reduce potential estate tax liability. It is a an irrevocable trust wherein the grantor retains the right to live in the residence for a number of years and the residence then passes to the beneficiaries. Depending on the length of the term chosen, the actual gift value for gift tax purposes may be greatly reduced. Since you have a lifetime $1,000,000 gift tax exemption, you may be able to transfer the entire residence free of any gift tax. At the end of the trust term you would be expected to pay fair market rental value to the beneficiaries. This has the effect of further reducing the estate tax. Moreover, the appreciation in the value of the property also escapes tax. To sum it up, you’re transferring the property at less than its market value, reducing the estate tax and the beneficiaries get the appreciated value free of estate tax. There’s a catch though!. Should it turn out that you pass away before the term of the trust is over, the residence is added back into the estate. However, tax wise, if properly planned, you will not be worse off than if you did not transfer into QPRT. QPRT may also be considered for asset protection purposes.

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