The Qualified Personal Residence Trust ("QPRT") represents an increasingly popular and effective planning technique for reducing the size of a person's taxable estate. By implementing a QPRT, you can transfer your home to your children at a greatly discounted estate tax cost.
Simply put, a QPRT is a trust that holds title to your personal residence for any term of years that you might select, whether five years or twenty years. For example, if you transfer your Las Vegas residence into a QPRT, you can remain the trustee of the trust and would select a period (the "term") during which you would continue to live in the house. At the end of that period, you can continue to live in the home, but title to the home will pass to your children. However, for estate and gift tax purposes, the initial transfer to the trust is treated as a taxable gift, but the amount of the gift is significantly discounted. During the term of the trust, the trustor enjoys the rent-free use of the residence without incurring any unfavorable tax consequences.
For purposes of valuing this gift, only the remainder interest in the residence is taxed. Because that is worth much less than the right to use the residence today, it would result in a substantial discount in value.
In order for you to have the value of the residence excluded from your estate, you must outlive the term. For example if you select a 10-year term, the value of your home would be excluded from your estate if you live more than 10 years and included in your estate if you live less than 10 years. The QPRT thus represents a pure option -- if you outlive the term, a very valuable asset is excluded from your estate at a highly disounted cost, and if you do not survive the term, the asset is included in your estate, which is what would occur any way, if you did not use a QPRT. Following is an example of the potential tax savings when a QPRT is implemented:
Age of Owner: 65
Fair Market Value of Home = $550,000
Value of Gift when transferred into Trust: $89,352
Value of House at 4% in 15 years: $990,518
Maximum Estate Tax on House with no planning: $544,784
Total Potential Tax Savings is $455,432