What is a QPRT and Why Would I Want One?
I’ve heard a QPRT as a good way to protect my home and pass it on to my children tax-free. What is it and should I have one?
QPRT stands for qualified personal residence trust, and I’m happy to bet and give steep odds that it’s of no use to you. A QPRT is an estate tax planning device that is only of use to you if your estate exceeds $11.7 million if you’re single and $23.4 million you’re married. If you have that much money, don’t get your estate planning advice from this site. Hire a high-priced attorney who will properly advise you on these arcane issues. (If you have less money, then please do use this site.)
Even if it’s no use to you, here’s how QPRTs work in broad strokes. Let’s say your $15 million estate includes a $5 million house. If you give the house outright to your children, you will have to file a gift tax return and the amount you will be able to give away tax free at death will be reduced from $11.7 million to $6.7 million. The purpose of a QPRT is to reduce the value of the gift. So, if instead of an outright gift to your children, you transfer the house to a trust that says you get to use the house for 10 years and if you survive 10 years, then the house goes to your children, then the value of the gift is reduced by the fact that your children have to wait 10 years to take possession of the property. If, for example, this reduces the value of the gift to $3 million, then you’ll still be able to give away $8.7 million at death. With a 40% federal estate tax rate, this could save your estate $850,000.
There is, however, a downside to this plan. Since your children receive the property during your life rather than at death, they will receive your basis in the property. If you paid $2 million for it and they sell it for $5 million, they will have to pay capital gains taxes on $3 million of gain. At a 20% tax rate, this could cost them $600,000, reducing the benefit of the plan (using these numbers) from $800,000 to $200,000. This could argue for using QPRTs for vacation houses that the family will be unlikely to sell, since the tax on capital gain only comes into play when and if the property is sold, the estate tax will be due at the death of the original owner.
In any case, as I mentioned above, if you are in a position where you or your family might benefit from a QPRT, get thee to an estate planning attorney who works with so-called high net worth clients. She can do the tax calculations based on your actual situation.