[§4:284   QUALIFIED PERSONAL RESIDENCE TRUST

A QPRT allows you to transfer your residence to your children at a substantially reduced estate and gift tax cost.  A QPRT is an irrevocable trust to which you transfer your residence and retain a right to live in the home for any number of years you select.  A QPRT reduces your estate taxes by allowing your home to pass to your children upon the conclusion of the term you select without further gift or estate tax. Gift tax is imposed upon the initial transfer of your home, but the value of the transfer for gift tax purposes reduced because you have retained the right to live in the home. This reduction in value is dependent on your age, current interest rates and the length of the retained term you selected. All appreciation in the home after the initial transfer passes to your children gift or estate tax-free. If you fail to survive the selected QPRT term, the value of your home will be included in your estate. However, your estate will receive a credit for any gift taxes paid.  

Asset Protection.   A QPRT protects your home from your and your children's creditors. The QPRT is irrevocable and you have only retained the right to live in the home for a designated term. Your creditors will only have limited access to the property during that term.  Once the term is completed, if the home remains in trust, the home can be protected from your and your children's creditors.

Can I Live in the Home and Retain Control Even After the Term?

While the home passes to your children upon conclusion of the term, you can retain control over the residence by:

What Assets Can I Put In a QPRT?

Your principal residence, plus one other residence.  A husband and wife could transfer up to three homes,  their principal residence and two vacation homes.  A mortgaged residence may be placed in a QPRT. However, free and clear property is normally used due to the  complexity caused by the mortgage.

What if I Sell the Residence?

You can as long as a replacement home is purchased within two years.  If you purchase a less expensive home, do not purchase a replacement, the difference converts into an annuity to you over the remainder of the term.

What are the Property Tax (in California) Consequences of a QPRT?

The QPRT is a grantor trust. Property tax payments made by you are deductible.  If you sell the home, you qualify for the capital gains exclusion of $250,000 ($500,000 for married persons). The initial transfer of your home will not cause reassessment because the QPRT is a grantor trust for which there is a reassessment exception.  Upon conclusion of the term, the transfer would not cause reassessment if it qualifies for the parent-child tax reassessment exception.

Do my Children Get a Stepped-Up tax Basis?

The residence is outside of your estate and therefore does not receive the date of death step-up.  

For Those Who May Have A Creditor already - The Totally Asset Protected QPRT:

A QPRT removes title of your residence out of your name, so a judgment cannot encumber the property. Although a QPRT was primarily an estate planning technique, with the gift tax exemption of $5m ($10m for married couples), our clients are less interested in gift taxation and more concerned with asset protection. They want to be certain that a creditor cannot seize or encumber the residence.

The attack a creditor will launch against your QPRT is that it was gratuitous (the transferor receives nothing in return), therefore, it was a transfer made to "hinder, delay or defraud" a creditor. You can obtain the benefits of a QPRT and have the transfer be for fair market value.

IRS Private Letter Ruling 200919002 determined that a simultaneous sale of the remainder interest in the residence with the transfer of the residence to a QPRT is permissible.   This technique allows the use of a life estate in the grantor, without the QPRTs predetermined term of years.

You kept a term of years (the Remainder) to live in your home. This is the value you kept.

This technique mitigates the one argument that a creditor has - the transfer is a gratuitous transfer. The Remainder Interest is purchased at fair market value. The client received cash from the Purchasing Trust, but cash is easier to protect than a residence.

A QPRT offers excellent asset protection. A QPRT coupled with the IRS approved technique is better. As a couple (during 2011-12 only) you have a $10m gift tax exemption. For those with a $10m or less estate, asset protection is of primary important.