What is a QPRT?

Chances are you’ve never heard of a QPRT (Qualified Personal Residence Trust.)  QPRTs are not as familiar as the Revocable Living Trusts (RLT) used by estate planners, and they’re not as prominent as the Irrevocable Life Insurance Trusts (ILIT) recommended by many financial planners; but for the right family and situation, the Qualified Personal Residence Trust can be the perfect solution to your concerns about how to transfer ownership of your home. Think about these questions:

• Would you like to protect your personal residence or vacation home from creditors and lawsuits?
• Would you like to pass your property to your children with as little estate tax or gift tax as possible?
• Would you like to continue to live in your home, but know that it will pass smoothly and tax-free to your children when you no longer need it?

A QPRT is one tool that can help you accomplish all of these goals by taking the property out of your taxable estate and putting it “in trust” for a specified number of years before ownership is transferred to the beneficiaries. During the specified number of years the grantors retain the right to live in the home and continue to take responsibility for maintenance and upkeep; however, at the end of the term the value of the “gift” to the beneficiaries is not based on the current market value of the property, but on the much lower actuarial value of the property as determined by the IRS actuarial tables.

In this way, creating a Qualified Personal Residence Trust is a useful way to give property to your children without incurring high estate taxes or gift taxes—and it allows you to continue living in your residence until a time of your choosing.

Setting Up A QPRT

Before you set up a QPRT you’ll need to decide 3 things:

1. Who will serve as the initial trustee(s)?—This will usually be the property owners—the people who will continue to use the property until the end of the term.
2. How long will you want to continue to live in the home?—This should be a length of time that is useful to the grantors, but not so long that the grantors are likely to pass away before the end of the term.  If the grantor dies before the end of the term the entire value of the property will end up being included in the taxable estate.
3. Who will be the ultimate beneficiaries of the trust?—This is most often the grantor’s children. But have caution when choosing your beneficiaries, once the term is over the property belongs to the beneficiaries, who may or may not choose to allow the grantors to continue their residence in return for fair market rent.

Once you’ve answered the above questions you’ll want to talk to an experienced attorney who can help you safely set up your QPRT.

What are the benefits of a QPRT?

The main benefit of a Qualified Personal Residence Trust is that it allows you to give a gift of significant value to your heirs without incurring heavy estate or gift taxes.  A QPRT removes a valuable piece of property from your taxable estate while allowing you to continue to enjoy the benefit of living in it.  Mom and dad have the security of knowing they won’t be kicked out of their home, while their children rest easy knowing that the inheritance of the family property is a foregone conclusion.  Additionally, during the time that it is in trust, the property is safe from lawsuits or creditors because it is not yet officially owned by either the grantor or the beneficiaries.

Are there any drawbacks to creating a QPRT?

A QPRT will not be the right solution for everyone. First of all, a QPRT will not be of much benefit if your property is still mortgaged.  Secondly, if the grantor dies before the term of the trust is up the property goes right back into the taxable estate and any benefits will be lost.  Thirdly, due to the exacting nature of the IRS rules and regulations, the creation of a QPRT requires the help of a knowledgeable and experienced attorney or tax planner—this is not a trust to attempt on your own!

Popularity: 8% [?]

Do you own a home?  If so, do you know what is going to happen to that home when you die?

Perhaps you want your spouse to have the house when you die.  Or maybe you plan to leave it to your kids. The question is: how is that transfer of ownership going to take place?

If you own your home jointly with your spouse you are probably safe in assuming that title will automatically pass to that spouse when you die; no need for probate, no need to re-title, a joint tenancy transition is generally very smooth. Unfortunately, the real problems with joint tenancy appear when the surviving spouse passes away and your children or other heirs have to contend with the lengthy and expensive probate process. Not only this, but your estate will be subject to estate tax, your heirs may be forced to sell in a down market—or be prevented from selling in an up market—there are simply no guarantees without an effective estate plan.

The fact is—if you own a home, you need a trust.

Putting your home into a living trust essentially keeps it out of your probate estate.  A living trust is an entity that continues even after the grantor passes away, which means that the “owner” of the asset still exists, and probate is thereby avoided. When you pass away ownership is transferred smoothly and immediately to the beneficiaries of the trust. In this way, you can leave your home to your spouse and then to your children without having to go through the probate process.

Another benefit of living trusts is their flexibility.  Whether you want to transfer ownership to a spouse, hold the property for a certain number of years while your children mature, sell and divide the proceeds among your grandchildren, or leave it to a charitable organization, a trust can help you do it.

If you have rental or investment property you may want to consider an LLC or FLP in combination with a living trust as a way to own the property, avoid probate, and easily transfer ownership when you die. For more information about the best way to hold your property, contact my office today.



Popularity: 15% [?]

Imagine this: Harold and Jane are a married couple on the verge of retirement; they have two grown children, one of whom is engaged to be married.  Harold and Jane own (jointly) the home in which they live… they also own a rental property—a small apartment complex—which they are ready to hand over to their children. Unfortunately, this scenario is not as easy as it might seem.  You see Harold and Jane worry that their son, although well-intentioned and smart, may not have the maturity to manage this kind of responsibility quite yet.  And although they trust their daughter completely they aren’t quite sure about her new fiancé. What are Harold and Jane to do?

Luckily, they have an option called a Family Limited Partnership which allows them to own property in partnership with each other, their children, or any other family member. Creating a Family Limited Partnership (or FLP or sometimes called FLIP) would allow Harold and Jane give both of their children an interest in the property income as limited partners, while Harold and Jane retain control over the financial decisions as general partners. As the kids gain maturity Harold and Jane can allow them more and more decision-making responsibility, or they can simply wait for the kids to inherit the general partnership when Harold and Jane pass away.

Another benefit to the Family Limited Partnership is that Harold and Jane are able to give partial ownership of the valuable property to their trusted daughter, while keeping it out of the hands of the questionable fiancé. Even if their daughter were to get married and then divorced, her ex-husband would have no claim on the apartment complex in the divorce because it was never fully the daughter’s asset. The most the ex-husband could possibly claim would be a portion of the income received by his wife, and Harold and Jane as general partners would have the power to decide how much income to distribute to each of the limited partners.

A very compelling side-effect of creating a Family Limited Partnership is explained very well by this article on MSN Money; dividing the ownership (and control) of a large asset lowers the value of the property for tax purposes.  One of the children could theoretically sell their interest in the property, but the value of that interest is low because the buyer would have no decision-making control over the asset.  Harold and Jane may also choose to have the income from the property go to the limited partners, retaining very little of it themselves, essentially lowering their income and placing them in a lower income tax bracket—something that might be appealing to Harold and Jane as retirees.

A Family Limited Partnership can give every family the options they need to protect their real estate (or other) assets, and the flexibility they need to keep the property in the family. An FLP might be exactly what your family needs—call our office and let us help.


Popularity: 14% [?]