What if I Survive the Trust Term? - Anthony J. Madonia & Associates, Ltd

Trust Term of a Qualified Personal Residence Trust (QPRT)

A qualified personal residence trust (QPRT) is a specific type of irrevocable trust that allows its creator to remove a personal home from their estate for the purpose of reducing the amount of gift tax that is incurred when transferring assets to a beneficiary. Qualified personal residence trusts allow the owner of the residence to remain living on the property for a period of time with “retained interest” in the house; once that period is over, the interest remaining is transferred to the beneficiaries as “remainder interest.” So how do you determine what is the right trust term of the QPRT?

Understanding the Trust Term

Depending on the length of the trust, the value of the property during the retained interest period is calculated based on applicable federal rates (AFR) that the Internal Revenue Service (IRS) provides. Because the owner retains a fraction of the value, the gift value of the property is lower than its fair market value (FMV), thus lowering its incurred gift tax. This tax can also be lowered with a unified credit.

If you are still living at the end of the term, you will have accomplished the goals of this planning strategy. Your children in our example (or trusts for their benefit) are now the owners of the house. However, you do not have to move out.To assure that you have a place to live, the terms of the QPRT can permit you to enter into a lease or rental agreement of the house with the remainder beneficiaries when the trust ends. The terms of the lease must be at fair market value. An additional benefit is that each payment of rent to the remainder beneficiaries will effectively transfer additional funds to them, free of gift or estate tax consequences.

The QPRT can also be written so that after the initial term of the trust, if a spouse survives you, your spouse can be permitted to occupy the residence rent free for his or her life.