Owning your own home can be a good step to building wealth and securing your future. Purchasing the right real estate can be a good investment, if you buy at the right time in the right area. Your estate plan should work hand in hand with your real estate purchases, as for most people, their residence is one of their most valuable assets. There are many choices regarding how to best handle your real estate in your estate plan. A Qualified Personal Residence Trust, or “QPRT,” is just one possible solution you may want to consider.
A QPRT may be the right trust for you and your estate plan if you plan to leave your home to a particular person in the future. Typically a QPRT is used when parents want to make sure to pass their home on to their children. With a QPRT, the person who creates the trust chooses a specific time limit during which he or she will continue to reside in the home. At the end of that specific term, the home is transferred directly to the named beneficiary. If the trust creator wants to continue to reside in the home after it is transferred from the trust to the beneficiary, then he or she will need to pay rent to the beneficiary.
The primary benefit to using a QPRT is to reduce potential tax liability. For tax purposes, the value of the home is fixed at the time it is transferred into the trust. The value of the home will count toward your lifetime gift tax exemption, not your overall estate tax limit.
There are a few drawbacks to using a QPRT. The most obvious is that if you pass away before the end of the time limit specified in the trust documents, then the trust is destroyed and your home will revert to being part of your estate. If you have a high number of assets, this could create an estate tax liability. Moreover, if the home has significantly increased in value since the purchase, the beneficiaries of the trust could face a significant capital gains tax in the future, which could possibly erase any gift tax savings enjoyed because using the QPRT.
QPRT planning can be beneficial when done properly. We have extensive experience in assisting our clients choose the right estate planning tools to fit their needs. Call us at 818.340.4479 today for a consultation.
