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BRIEF BYTES: Question and Answer
Forum
The purpose is to answer frequently
asked or unusual questions. Topics will range from real estate,
business, litigation and trusts and estates. Your feedback
is appreciated. Direct your comments to Cherisse Roy at croy@scott-harris.com
Question: What is a Qualified Personal Residence Trust
(QPRT)?
Response from Cynthia Jackson,
Esq.:
The Qualified Personal Residence Trust is a planning device
that can lessen the tax burden of passing residential real
estate to the next generation. To employ a QPRT the property
owner transfers a primary or second residence to an irrevocable
trust. The owner reserves the right to live in the residence
for a certain period of time. After that period passes, the
property passes to whomever the owner designated in the Trust,
usually children or other heirs. If the owner continues to
occupy the property after that time period, he must pay rent.
By transferring the residence to an irrevocable trust the
owner has made a taxable gift that is applied against the
exemption amount. However, the value of the gift is discounted
by the value of the time the owner will occupy it instead
of being valued at full market value as of the date of death.
In this way the owner has transferred a valuable asset at
a discount to the heirs who would receive it anyway. The asset
has been removed from the owner's estate and the former owner
can still occupy the residence.
Special consideration must be made in choosing the term of
possession of the residence. It should be long enough to allow
for a substantial discount of the gift but not so long that
the owner will not survive the term. Failure of the owner
to survive the term will defeat the purpose of the QPRT. Also,
the owner must reconcile himself to the idea of giving up
his rights to the residence after the term ends. Although
he may lease from the new owner there cannot be a preexisting
arrangement to that effect.
To implement a QPRT you must pay to draft the document, prepare
a 709 Federal Gift Tax Return and obtain a certified appraisal
of the property.
For many clients this cost is minor compared to the possibility
of saving hundreds of thousands of dollars in estate taxes.
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