Qualified Personal Residence Trust

What is it? A Qualified Personal Residence Trust ("QPRT") is a special trust used as an estate planning technique to leverage a gift of your principal residence or vacation home out of your estate at a significant discount from its current value. The technique, when successful (which requires your outliving the term of the trust) can save substantial estate taxes.

Standard Use: You gift your house to a QPRT and reserve the right to live in the house for a specified number of years, typically 5-10 years. After that time period the heirs own the house. Often you'll reserve the right to continue to lease the house after that term at fair market value.

Tailored Use: While QPRTs are typically used by older taxpayers to save estate tax, you might consider using a QPRT even if much younger for asset protection purposes. Suppose you are considering accepting a position on a board of directors and are concerned about the potential liability. You transfer your house to a QPRT for a 25-year term, lasting into your retirement. In the event of a later suit or claim, absent a fraudulent conveyance (e.g., you transfer the property after a claim arises against you), the house is owned by an irrevocable trust with remainder beneficiaries having an interest in the trust's property.

Key: A QPRT can be more than just an estate plan, it can be part of your asset protection plan to protect your house.

Creation of a Successful QPRT: To succeed, you must have all your QPRT ducks in a row-not a simple task considering that many different professionals are involved. Unless you have expressly confirmed that one professional is "honcho'ing" the plan, make sure you have all the following documents and steps addressed. Too often taxpayers try to address many of these steps to control professional fees and the steps are ignored or only partially completed, undermining the objectives:

• Trust Agreement: Be sure you have a signed original of the QPRT agreement. The agreement should be dated (too often trustees fail to fill in the date in the blank provided). Signatures should be witnessed and/or notarized as required in the document. The house to be transferred to the trust should be indicated in the trust or an attached schedule. In many plans there may be two QPRT agreements as ½ of the house is often transferred to a QPRT for the husband, and ½ to a QPRT for the wife. If there are any questions on these items contact your estate planning attorney.
• Tax Identification Number: A trust must have its own tax id number (also called an Employer Identification Number) issued by the IRS. This number serves the same function as a social security number for a person-the IRS uses the number to identify taxpayers that are required to file various business tax returns. A copy of the IRS documentation assigning the number should be saved. If you cannot find the information, call your accountant.
• Deed: You should have an original deed that reflects the stamp of the local recording office (e.g. the County Clerk) and the book and page number where recorded. The deed should be consistent with the manner in which the QPRT trust agreement was structured. So, if you and your spouse owned the house jointly as tenants by the entirety (which is common) but each plan to transfer ½ the house to your respective QPRTs, then you should first have a deed transferring the property from the two of you as husband and wife (i.e., tenants by the entirety) to the two of you as tenants in common (so that you each own a divisible half interest to transfer). After the date that deed is recorded you should have a second deed recorded from each of you to your respective QPRTs. The date on the deeds to the QPRT and their recording should be after the dates on the deed changing the title to tenants in common. The deeds transferring the house into the QPRTs should ideally be dated the same date as the QPRT. If you are missing any of these items contact your real estate attorney or estate planner (depending on who prepared the deeds).
• Appraisal: An appraisal confirming the value of the house when given to the trust, and any discounts if less than 100% was given, is essential. If you cannot find a copy, contact the appraiser used to obtain one.
• Gift Tax Return: A gift tax return should have been filed reporting the gift of the house to the trust. If you have a complete copy of the filed return, it may have many of the other documents and information attached (deed, appraisal, basis calculation, etc.). If a gift tax return was not filed, or if you're not sure, call your accountant or estate planner (depending on who prepared the return).

  NOTE: If you already deeded your house into a QPRT and failed to file a gift-tax return, do not ignore this oversight! The IRS will eventually find out and they will be much more forgiving if you approach them with a mistake then if you wait for them to find it.

• Income Tax Return: Some accountants file a Form 1041 trust income tax return with an attached statement indicating that the QPRT is a "grantor trust" and that all deductions (there should be no income unless it was converted to a QAT on the sale of the house) are reported on your personal return. If an income tax return was not filed, or if you're not sure, call your accountant.
• Insurance: Your property and casualty insurance, and title insurance, should all be updated to reflect the QPRT as owner, and it should also list the trustees as insured. If you're not certain, call your insurance agent.
• Mortgage: If there is, or was, a mortgage or home equity line of credit, a copy of the mortgage or line, and the documents and steps taken to address it in the context of the QPRT should be saved. Payment of principal on your home mortgage made by you as an individual would constitute additional gifts to the QPRT each time you make a payment. Different estate planners address this issue in different ways (the simplest being to pay off any mortgages before the transfer to the QPRT). The documents confirming how you implemented this plan should be saved. If you're not clear and had a mortgage, contact your accountant and estate planner.