How does a QPRT work in estate planning?

On Behalf of | Jan 15, 2025 | Estate Planning |

A qualified personal residence trust (QPRT) is a powerful estate planning tool that helps individuals reduce the taxable value of their estate while retaining the right to live in their home. This strategy can save families significant amounts in estate taxes, making it a popular choice for homeowners with high-value properties.

The basics of a QPRT

A QPRT allows a homeowner to transfer their personal residence into an irrevocable trust for a set term of years. During this term, the grantor retains the right to live in the home without paying rent. Once the term ends, ownership of the property passes to the beneficiaries named in the trust, typically children or other family members.

How a QPRT reduces estate taxes

The primary benefit of a QPRT is its ability to lower estate taxes. When a property is transferred into the trust, its value is discounted based on the grantor’s retained interest—the right to live in the home during the trust term. This discounted value reduces the taxable estate, potentially saving the beneficiaries thousands of dollars in taxes.

Risks and considerations

While a QPRT offers significant benefits, it also comes with risks. If the grantor passes away before the trust term ends, the property returns to the taxable estate, negating any tax savings. Additionally, once the term ends, the grantor must either move out of the home or pay fair market rent to the new owners if they wish to stay.

Who can benefit from a QPRT?

QPRTs are ideal for individuals with high-value homes who want to preserve wealth for their heirs. However, they work well for those confident they will outlive the trust term and are comfortable relinquishing control of the property after the term expires.

By understanding how a QPRT works and seeking professional guidance, individuals can make informed decisions that align with their estate planning goals.