A Qualified Personal Residence Trust (QPRT) is an irrevocable trust created by an individual (usually a parent) who wishes to transfer their personal residence or vacation home to family members (usually children) in the future to reduce the overall transfer tax burden. A QPRT can exclude up to the full value of the residence from the Grantor’s estate.
A QPRT will provide the Grantor the right to use and occupy the personal residence for a specified term. It is common for the trust instrument to state the term for a specified number of years. The term is determined on a case-by-case basis considering the grantor's age, probable life expectancy, and tax savings. When the term is for a specified number of years, the trust will provide that the term will expire on the earlier date of (a) if the Grantor dies before expiration of the specified term, on the death of the Grantor or (b) if the Grantor outlives the specified term, on the expiration of the specified term. In the former, (Grantor dies before the expiration) the personal residence will be included in the taxable estate of the Grantor. In the latter, (Grantor outlives the specified term) up to the entire present value, including appreciation during the specified term, can be excluded from the Grantor’s estate.
A QPRT is permitted to hold only one personal residence and during the entire specified term, the residence must be used for use as a personal residence of the grantor. A personal residence may be either a principal residence or a second home. If the grantor is living at the end of the specified term, the Grantor will lose her/his interest in the residence on the expiration of the specified term. For this reason it is very important that other arrangements are made at the same time to permit the grantor to live in the residence beyond the specified term.
Although it is suggested that someone other than the Grantor act as the trustee, there are no legal prohibition or tax disadvantage to naming the Grantor as trustee of a QPRT.
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