Armanino Blog

A QPRT Will Leave the IRS Saying "@!#[email protected]!"

by John Karls
June 02, 2017
Do you own a beach house, ski chalet, resort condo or other vacation getaway? Perhaps a place where cherished family reunions take place with your children and grandchildren? Then like many people, you may want one or more of your homes to stay in the family, while you also want to limit estate and gift taxes upon a home’s transfer.

A Qualified Personal Residence Trust, or QPRT (pronounced q-pert), is an excellent tax-efficient vehicle to transfer your primary or vacation home out of your estate. The name may also remind you of that favorite orange video game hero from the classic 1980s game Q*bert. Although the two are very different creatures, if implemented correctly, a QPRT will have the IRS saying the game’s famous catchphrase: “@!#[email protected]!”

How a QPRT works

In video games, it’s easy to determine values. Whether you’re chomping a ghost or jumping a barrel, the amount tallies on the top of the console screen. Computing the value of the gift of a home is a little more complicated.

In a QPRT, the gift’s value is determined by calculating the home’s present value discounted over the trust’s term, using an interest rate specified by the IRS. Any future appreciation on the property is removed from your estate, because the value of the gift is determined on the date the house is placed in trust. The value of the residence is frozen at the time it is placed into trust, which is what makes it such a powerful estate planning technique.

While a QPRT may not be quite as easy as shooting asteroids or space invaders, the way it works is far from complex. You basically transfer ownership of your personal residence or vacation home to a trust, and you retain the right to use the property during the trust term. After that, your children or other designated beneficiaries become the owners of the property.

It only gets better at the end of the trust term. If you still want to use the property, you can work out a rental arrangement with your trust beneficiaries. This allows you to transfer additional wealth to future generations through rental payments. It’s the gift that truly continues giving!

The advantages of a QPRT are simple: It allows you to get your home out of your taxable estate at a reduced tax cost, and the trust creation is a private transaction, so it may not subject the property to probate. Transferring property to a QPRT is considered a taxable gift, but you get a substantial break. The value of the house is discounted for gift tax purposes because you’re allowed to continue using it for the term of the trust.

Consider the pros and cons

A QPRT can potentially save your heirs a large amount in taxes. However, the trust is irrevocable and the tax rules are complex. So, you need to understand the pros and cons before you give away such a valuable asset―and one that you may be emotionally attached to, as well.

There are some important items that you need to consider before entering the transaction:
  1. Don’t pick a trust term that is too long. Your goal is to continue using the home while getting it out of your taxable estate. So, choose a term for the trust that you expect to outlive. If you die before the end of the term, the home goes back into your taxable estate with no tax savings. For estate purposes, it is as if the transaction never happened, so you are truly only out the professional fees you paid to enter into the transaction.
  2. Think about the future. If you’re planning to rent the house from your children or other beneficiaries after the trust ends, don’t make the future rental a provision of the QPRT. The IRS could invalidate the trust. Don’t set up a QPRT unless you have a good relationship with the beneficiaries, including in-laws. You don’t want to worry about being forced to move someday after the trust ends.
For some families, passing a cherished vacation home on to the next generation is an important goal. A QPRT may provide a way to achieve that goal at a reduced tax cost.

As with other planning ideas, there are multiple factors that impact the value of the reportable gift. Current interest rates and home values greatly affect a qualified personal residence trust, so you should speak with your attorney and your tax advisor, who can explain the specifics in your situation.

June 02, 2017

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John Karls - Partner, Tax - Dallas TX | Armanino
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