Here at the Meurer Law Offices in Denver, we often help our clients work through the pros and cons of a residence trust, more specifically a qualified personal residence trust or QPRT. There are many types of trusts, all with their own benefits and challenges. And that leads to a lot of great questions about them – today let’s focus on the residence trust.
A qualified personal residence trust is a specific type of irrevocable trust. It is a way to remove the value of your primary residence or second home from the total value of your taxable estate. It allows for a reduced rate for your federal gift tax and estate taxes.
A QPRT is not easily undone, so it’s important to understand a few things up front before making the decision to put your home into a QPRT.
- It creates a legacy for your family. Some homes have special meaning to your family and you want them to stay in the family for generations. Beach homes, lake houses, or other special homes are often put into QPRTs. It enables you to pass the home to you heirs in a way that encourages them to hold onto it for future generations in the same way.
- QPRTs permit continued use of the home and maintain the current tax benefits.
- A QPRT removes the future appreciation and the value of the residence from your taxable estate.
- If the estate tax exemption and lifetime gift tax exemption are decreased in the future, your estate will be unaffected because it locks in the value of your residence for these purposes and the exemption value as well.
- You further reduce your taxable estate. There is a retained income period that is determined by variables such as your age and the current value of the residence. When the retained income value ends, you start paying rent to your heirs. This allows you to give your heirs money while not using your lifetime gift tax exemption and not using your annual exclusion gifts.
- Selling the QPRT home can be much more difficult.
- When the retained income period is over, in order to use the residence, you must pay rent.
- Your heirs inherit the home with your income tax basis at the time the home was put into the QPRT. If your heirs sell the home, they will need to pay the capital gains tax. This could be substantial depending on what the home is sold for and what the income tax basis at the time the residence was placed in a QPRT.
- The QPRT will dissolve if you die before the retained income period is complete. If you have health issues or have concerns about your future health, a QPRT may not end up working for your heirs.
- You may lose your property tax benefits at the end of the retained income period.
Since this is just an overview of the pros and cons of a residence trust, please contact us at the Meurer Law Offices in Denver, to go into further detail about whether a QPRT would be right for your and your family based on your specific situation. Call today for a free initial consultation.
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