Qualified Personal Residence Trusts
While we still haven’t had the long expected change to the Federal Estate and Gift Tax, it seems likely that the law
will change making the rate and exemption levels that took place in 2009 permanent. That would mean that estates
worth up to $3.5 million for individuals and up to $7 million for couples would be exempt from any taxation and those
above those amounts would be taxed at 45 percent.
Even with the downturn in the real estate and stock markets, it’s a good time for high net-worth individuals and
couples to look at ways to shelter their estates from the possibility of taxes going forward. One possibility for
couples who have a substantial investment in real estate they consider a residence is the Qualified Personal Residence
Trust (QPRT). A QPRT is a trust that owns the home at a discounted value for a specific term while allowing you to
continue living in the home.
The QPRT works best for those people who expect to live another decade or so. The longer the term of the trust;
the greater the potential tax benefits. Yet you’re essentially playing a game of chicken with the Grim Reaper—if one
or both of the parents die before the trust expires, the heirs have to pay the estate tax on the value of the house at the
time the parent died.
Technically, QPRTs make the most sense when interest rates are high, because the higher the interest rate, the
greater the discount applied to the property, which, in turn, increases the tax savings. A QPRT is based not on the
current value of the house at the time the trust is being written, but what is determined to be the present value of a
future gift, which is actually a discount to the current value. When a home is put into the trust its value is not the
current value of the house, but what is called the "present value" of the future gift - a decrease of 25-50 percent in
value. The Internal Revenue Service calculates these formulas, so ask your expert how current calculations will affect
the value of your estate.
Another potential benefit of the QPRT is that if the parent runs into trouble with high hospital or medical bills, the
hospital cannot demand any money gained by refinancing or selling the house, since the occupant does not have any
right to that money.
If the rough real estate market has devalued your home at least a little, chances are that the market may rebound
sometime during the term of the trust and if you outlast the trust at its expiration, the strategy may work out very well
for your heirs.
Obviously there are a number of considerations here, not the least of which involves the current value of the property.
Your adviser should help you consider all these issues, and you should keep an eye on the news for what eventually
happens with the capital gains tax as well as what ends up happening with the estate tax.
Oh, and if the parent outlives the trust, the parent can continue to live in the house by paying the kids fair-market
rent. There’s one more wrinkle to try if the kids want to avoid income taxes on the rent they’ll receive from their
parents—they can form a grantor trust for the property so the rent is paid to the trust.
©2010 Yardley Wealth Management, LLC. All rights reserved.
While we still haven’t had the long expected change to the Federal Estate and Gift Tax, it seems likely that the law
will change making the rate and exemption levels that took place in 2009 permanent. That would mean that estates
worth up to $3.5 million for individuals and up to $7 million for couples would be exempt from any taxation and those
above those amounts would be taxed at 45 percent.
Even with the downturn in the real estate and stock markets, it’s a good time for high net-worth individuals and
couples to look at ways to shelter their estates from the possibility of taxes going forward. One possibility for
couples who have a substantial investment in real estate they consider a residence is the Qualified Personal Residence
Trust (QPRT). A QPRT is a trust that owns the home at a discounted value for a specific term while allowing you to
continue living in the home.
The QPRT works best for those people who expect to live another decade or so. The longer the term of the trust;
the greater the potential tax benefits. Yet you’re essentially playing a game of chicken with the Grim Reaper—if one
or both of the parents die before the trust expires, the heirs have to pay the estate tax on the value of the house at the
time the parent died.
Technically, QPRTs make the most sense when interest rates are high, because the higher the interest rate, the
greater the discount applied to the property, which, in turn, increases the tax savings. A QPRT is based not on the
current value of the house at the time the trust is being written, but what is determined to be the present value of a
future gift, which is actually a discount to the current value. When a home is put into the trust its value is not the
current value of the house, but what is called the "present value" of the future gift - a decrease of 25-50 percent in
value. The Internal Revenue Service calculates these formulas, so ask your expert how current calculations will affect
the value of your estate.
Another potential benefit of the QPRT is that if the parent runs into trouble with high hospital or medical bills, the
hospital cannot demand any money gained by refinancing or selling the house, since the occupant does not have any
right to that money.
If the rough real estate market has devalued your home at least a little, chances are that the market may rebound
sometime during the term of the trust and if you outlast the trust at its expiration, the strategy may work out very well
for your heirs.
Obviously there are a number of considerations here, not the least of which involves the current value of the property.
Your adviser should help you consider all these issues, and you should keep an eye on the news for what eventually
happens with the capital gains tax as well as what ends up happening with the estate tax.
Oh, and if the parent outlives the trust, the parent can continue to live in the house by paying the kids fair-market
rent. There’s one more wrinkle to try if the kids want to avoid income taxes on the rent they’ll receive from their
parents—they can form a grantor trust for the property so the rent is paid to the trust.
©2010 Yardley Wealth Management, LLC. All rights reserved.
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Michael J. Garry, CFP®, JD/MBA, owner of Yardley Wealth Management, LLC,
is an independent Financial Advisor who provides Fee-Only financial planning
services and investment management in Newtown, PA.
is an independent Financial Advisor who provides Fee-Only financial planning
services and investment management in Newtown, PA.
| Address: 41 University Drive Suite 400, Newtown, PA 1894 Phone: 267-573-1019 Toll free: 877-251-4393 Fax: 267-604-9164 mgarry@yardleywealth.net |