Qualified Personal Residence Trust

Qualified Personal Residence Trust


QPRT is a special type of trust, regulated by Internal Revenue Service regulations.

A QPRT takes advantage of certain provisions of the law that allows a gift to the trust by its creator (or the "settlor") of his or her personal residence, usually for the ultimate benefit of children, at a "discounted" value. This, in turn, may remove the asset from the settlor's estate, reducing potential estate taxes on the settlor's death.

If a trust conforms to all of the requirements set forth in the regulations, it is not subject to certain special valuation provisions of Internal Revenue Code which limit such gift tax valuation rules.

From the asset protection point of view, one of the effective way to protecting your home is to limit your rights in some manner so that there is nothing legally available that can be reached. If your ownership of your home changes from full and complete to something less, your interest may have no value to a prospective creditor.

Of course, the absolute way to protect your home is to gift the full ownership to your children and you no longer live there. This is too dramatic a change to most people and is not practical.

QPRT removes the house from your taxable estate after a term of years chosen by you, while still allowing you to currently enjoy income tax deductions from it. Thus it makes QPRT a powerful gifting tool to protect your home and allows a person to minimize estate taxes by leveraging his or her estate and gift tax credit and freezing an appreciating asset at its current value.

Of course, there are several important issues with it that you should keep in mind.

  1. First, when the QPRT is set up, the number of years your home remains in trust before it passes on to the beneficiary must be specified. The longer the term of the trust, the lower its overall gift tax burden. However, the problem is sometime you have to balance the possibility if you die before the end of the trust term, the house is taxable on death and all estate tax benefits are lost. But, you are in no worse a position from an estate tax perspective had you not done the trust at all, other than the cost of setting it up.  Health, genetics and longevity are all to be considered when choosing a term.
  2. Another issue to consider is that, while it is in trust, it can be difficult to finance your home. While all Qualified Personal Residence Trusts (QPRTs) allow for sale of the home and even a repurchase of a new one, it is still more difficult to refinance or obtain a mortgage loan than if you owned it outright.  A house with an existing mortgage or equity line of credit may be transferred to a trust provided certain formalities are met.

Even with these caveats, the qualified personal residence trust is still a reliable choice for tax savings and asset protection, especially in today's depressed housing market. Since the tax calculations in setting up the trust are based on its current market value, low housing values can turn into additional tax savings down the line when the home eventually recovers and appreciates outside the hands of the government.

In the end, a residence trust is best suited for those who do not wish to borrow against the home, are in relatively good health, have assets in excess of $1m and are most concerned with preserving their home for future generations while protecting it from possible legal threats today.