If you are planning your estate and realize that your primary or other residence significantly impacts the total value of your estate, leveraging a qualified personal residence trust (QPRT) could help reduce exposure to taxes.

A QPRT is an estate planning tool that allows you to remove the value of your residence from your estate, while retaining the right to occupy the residence for a period of time. One of the key advantages is that it makes it possible for you to transfer assets of significant value to family members with little or no gift tax incurred.

How a QPRT Works

  • You transfer your primary or a secondary residence to an irrevocable trust
  • You retain the right to live in the residence for a specified period, as outlined in the trust document
  • After the specified period, the residence transfers to your beneficiary
  • You may be able to rent the property from your beneficiary at fair market value (FMV)
  • The QPRT will be considered a grantor trust, which means that the grantor will be deemed the owner for income tax purposes, and will still be able to deduct real estate taxes paid
  • Provided you live beyond the term of years selected for use, you will have leveraged the gift to your beneficiaries

How the Gift Value Is Calculated

When you transfer the residence into the QPRT, you made what is called a “future interest” gift. The amount of the taxable gift is calculated by subtracting the retained interest held by the grantor from the FMV of the residence at the time the QPRT is created.

Using the below illustration as an example—which assumes a 66-year-old grantor uses the property for 16 years at a 4.6% Internal Revenue Code 7520 interest rate (the rate the IRS requires for the calculation), and assuming the residence has a FMV of $1,000,000 when initially placed into the trust subject to a reversion—the value of the interest retained by the grantor would be $732,350.

The value of the remainder interest (which would be the taxable gift) would be the FMV of the home placed into the trust ($1,000,000) minus the value of the minus the value of the retained interest held by the grantor ($732,350). Therefore, the taxable portion of the QPRT gift would be $267,650.

This remainder interest, by definition, is a future interest gift and will not qualify for the annual exclusion. The donor will have to utilize all or part of their gift and estate tax exemption (or if the full exemption is exhausted, pay the appropriate gift tax).


Little or No Gift Tax

In the example above, the cost of removing $1,000,000 from the gross estate (plus all appreciation from the date of the gift) is the use of $267,650 of your lifetime gift and estate tax exemption. Assuming a 4% growth in value of the residence, after 16 years you will have given away a residence worth $1,872,981 for just $267,650—resulting in $642K of federal estate tax savings.

The longer the term you specify, the larger the value of the interest you have retained—and the lower the value of the gift you will have made. However, the longer the term of the trust, the greater the probability that your death will occur during the term of the trust. When a grantor dies during the term of the QPRT, the retained interest will cause inclusion in the grantor’s estate, and the trust property will be included in their taxable estate at FMV.

Please note that a QPRT can hold limited amounts of cash for expenses or improvements to the residence and can allow the residence to be sold (but not to you or your spouse). However, if the residence is sold, or if the QPRT ceases to qualify as a QPRT for any other reason, either all the trust property must be returned to you or the QPRT must begin paying a “qualified annuity” to you (much like a grantor-retained annuity trust, or GRAT).

Speak with your Janney Financial Advisor today about how a QPRT may fit into your estate plan.

Working With Janney

Depending on your financial needs and personal preferences, you may opt to engage in a brokerage relationship, an advisory relationship or a combination of both. Each time you open an account, we will make recommendations on which type of relationship is in your best interest based on the information you provide when you complete or update your client profile.

When you engage in an advisory relationship, you will pay an asset-based fee which encompasses, among other things, a defined investment strategy, ongoing monitoring, and performance reporting. Your Financial Advisor will serve in a fiduciary capacity for your advisory accounts.

For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.

By establishing a relationship with us, we can build a tailored financial plan and make recommendations about solutions that are aligned with your best interest and unique needs, goals, and preferences.

Contact us today to discuss how we can put a plan in place designed to help you reach your financial goals.

Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.

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