Qualified Personal Residence Trusts (QPRT) and Depressed Real Estate Values

Home values seem to be dipping every month, and face it, you’re not getting any younger. Have you considered that upon your death, the value of your home might be enough to push your estate from non-taxable to taxable? If you were to die in 2008 and your estate was valued at less than $2,000,000, there would be no federal estate tax. But if the value of your house (or anything else, for that matter) causes you to exceed that magic number, then presto — your estate is paying taxes.

A QPRT (Qualfied Personal Residence Trust) is essentially a way to move your home out of your estate, thereby lowering the value of your estate upon your death. At the same time, you still get to live in your home while you’re alive.

How does this work? Let’s say your house was worth $750,000 in early 2007 but is only worth $500,000 now. Let’s also assume that your goal is to leave your house to your children upon your death. You can lock in the lower value of $500,000 by gifting the house into a QPRT right now with your children as the beneficiaries of the QPRT. The trust must be created for a fixed amount of time (10 years is standard, but not required). The trust terminates either when that time expires, or upon your earlier death. At that point, your beneficiaries inherit the house. The house is not considered as part of your estate, and is therefore not subject to estate tax.

So what’s the downside? Well, there are a few things — first of all, when you gift your house into the QPRT, you have to file a gift-tax return with the IRS in the year that you gifted the house. Currently, the IRS allows you to gift up to $1,000,000 tax-free during your lifetime. So if your house is worth $500,000, you won’t owe any gift tax right now. If your house is worth more than a $1,000,000, you will. Second, you do have to continue to pay the costs associated with living in the house during the term of the trust, although you would have to do that anyway. Third, once the term of the QPRT expires, if you are still alive, you will have to pay fair-market rent to the beneficiaries of the QPRT to continue living there, or risk scrutiny from Uncle Sam.

If you are concerned about your beneficiaries and the tax burden they may face upon your death, now is a good time to act. By creating a QPRT, you can take advantage of current depressed real estate values to help protect your heirs in the long run. Even if you do not feel a QPRT would be a viable estate planning device for you, there are other estate planning tools out there that may be right for you. Whatever you do, make sure your family is financially prepared in the event of your death.