Meurer Law Offices, P.C., serves clients in Denver, Greenwood Village, Centennial, Aurora, Littleton, Englewood, Arvada, Westminster, Broomfield, Parker, Castle Rock, Lone Tree, Sheridan, Elizabeth, Kiowa, Lakewood, Parker, Highlands Ranch, Denver County, Arapahoe County, Adams County, Douglas County, Jefferson County, Colorado.
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Qualified Personal Residence Trust
A Qualified Personal Residence Trust (“QPRT”) allows you to save estate taxes by removing your home, a substantial asset, from your estate. However, you retain the right to live in your home for a period of time, usually 10-15 years. When this time is up, the home transfers to the Trust Beneficiaries, usually your children. If you wish to stay in the home longer, you need to make arrangements to pay rent. If you die before the Trust ends, your home would be included in the estate just as it would without a QPRT. Furthermore, a QPRT “leverages” your estate tax exemption. Since your children will not receive the house until the Trust ends, its value as a gift is reduced. For example if the current value of your home is $450,000 and you put it in a QPRT for 15 years, its value for tax purposes could be as little as $100,000. That leaves much more of your federal estate tax exemption for your other assets.
In a QPRT, you transfer your residence to a Trust but keep the beneficial right of use for a certain period of time or term of years. You choose the term of years. The trick to the success of QPRT is to select a term of years that will end before your death. If you die before the term has lapsed or expired, the home will be included in your estate and estate taxes will be paid on it. If you do not die during the Trust term, the home will transfer to the beneficiaries without any estate or gift taxes.
In a typical case, spouses own their home jointly. However, if they wish to establish a QPRT it is generally advisable for one spouse to transfer his or her share of the home to the other, and that spouse will, a short time later, transfer the entire home to a QPRT. In addition, the spouse making the Trust should the younger and healthier spouse, because in order for the Trust to work properly, the Settlor spouse has to outlive the term of the Trust.
Under Treasury Regulations Section 25.2702-5 (C)(2) each person is permitted to create two QPRT’s, one for a principal residence and one for a vacation home/occasional residence. A vacation home can be transferred to a QPRT provided the Grantor lives in the home the greater of 14 days or 10% of the number of days the vacation home is rented to third parties. At least one of the two residences must be the primary residence. The home must be continued to be used as your personal residence throughout the term of the QPRT. If it is not, the QPRT fails. There is an exception to this rule. If the home is destroyed or damaged, and if the home is sold, the sale proceeds must be used to purchase another residence within two years for the QPRT to continue.
If the property you want to transfer to the QPRT is a house with other buildings, like a barn with several acres, the QPRT will be valid if you can demonstrate that the other buildings and land are used for residential purposes.
Putting a mortgaged residence in a QPRT is generally a bad idea because the IRS will consider part of each mortgage payment (the payment on principal) as a taxable gift to the Trust and or beneficiaries. To avoid this it is best if you pay off your mortgage before you transfer the home to the QPRT. A personal residence that is mortgaged may be transferred to a QPRT; however, to the extent a residence is encumbered, the value of the property transferred, will be reduced for gift tax purposes. As mortgage payments continue to be made by the Grantor, additional gifts are made to the Beneficiaries.
A QPRT is an appealing Estate Planning tool because it combines estate and gift tax savings with minimal life style changes, while avoiding fears that too much is being given away.
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Meurer Law Offices
5347 S. Valentia Way, Suite 220
Greenwood Village, Co. 80111
303.991.3544
Estate Planning Attorney
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MEURER LAW OFFICES, P.C.
5347 South Valentia Way, Suite 220
Greenwood Village, CO 80111
Phone: 303-991-3544
