A Qualified Personal Residence Trust (QPRT) removes the value of your residence from your taxable estate. It is also a creditor protection vehicle. Thus, the advantages are real and easy to grasp.
What are the disadvantages of QPRTs?
1. Death. If you (the settlor) die during the term the QPRT is disregarded. The property held in trust will be included in your taxable estate. For estate tax purposes, the home will be treated as if you never created a trust.
2. Life. If you are still living at the end of the term, your children (or trusts for their benefit) are now the owners of the house. If you want to stay in your home, you have to pay fair market rent to your children.
On the other hand, each payment of rent to the remainder beneficiaries will effectively transfer additional funds to them, free of gift or estate tax. The QPRT can also be written so that after the initial term of the trust, if you are survived by a spouse, your spouse may occupy the residence rent-free for life.
3. Carry-over Basis. With a QPRT, you are passing the house to your children with your original income tax basis. Say you bought your house for $75,000 and years later sold it for $400,000. You realized a gain of $325,000. Your basis of $75,000 would carry over to the trust. But if you had given the home in your trust or will at death to a beneficiary, that beneficiary would have the benefit of step-up basis.
4. Irrevocability. A QPRT is an irrevocable trust that will last for a term of years. So, you must be psychologically comfortable with giving up some control. Once you put your home into the trust, it (or proceeds from its subsequent sale) will stay in trust and be owned by the trust.
5. Low Interest Rates. In low interest rate climates, the lifetime exemption you apply to the QPRT can often be better leveraged in other vehicles, such as life insurance trusts or grantor retained annuity trusts.
6. Borrowing. Banks may be less willing to lend to an irrevocable trust than to an individual.
Bottom line: QPRTs have their place. They can move a great deal of wealth out of your taxable estate. But they’re not for everybody.
Thanks for reading!
Author Edgar Saenz