QPRT is a form of irrevocable life trust designed to reduce the amount of gift and property taxes that are generally incurred when transferring assets to beneficiaries. According to QPRT law is a suitable legal technique to protect individual assets for their beneficiaries and protect those assets from creditors and appraisal. An irrevocable trust cannot be changed in any way for as long as the trust lasts. This helps to ensure that a judge cannot simply order someone to hand over a protected asset to a creditor or change the circumstances of the trust to allow someone else to acquire the asset.
After a residence is transferred to the trust by means of a properly prepared and executed deed, the transferee retains the right to live in the house for a number of years. As long as the owner lives in the house, no rent is paid. The landlord is responsible for all housing costs such as repairs, real estate taxes and maintenance costs covered by the 2003-42 Income Procedure [2003-23 IRB 993 section 4 Art. II (B) (2)]. If the owner is still alive after a predetermined number of years, the trust automatically transfers ownership of the home to the owner’s beneficiaries without having to pay estate taxes. The beneficiary can rent the house to the original owner of the house. The most exciting part of this plan is paying the rent after QPRT expires, the owners transfer additional assets to their beneficiaries without having to pay any gift or land taxes. Having received the rent from their parents does not prevent them from returning the money to their parents. If the house is sold, the proceeds from the sale can be used to buy another house or other goods for the parents according to the wishes of the beneficiary.
QPRT’s main advantage is the tax savings it provides to property owners and beneficiaries of the trust. When a residence is submitted to a QPRT it is considered a gift but the typical IRS gift tax is not assessed. Instead, the IRS calculates modified gift tax based on published tables and the total time the home was lived in the QPRT, which is applied to the home’s value. After the expiration of the trusteeship period, which was agreed upon when creating the QPRT, and the owner is still alive, the residence is passed on to the beneficiaries without gifts or land taxes.
If a residence has appreciated in value since its original appraisal, gift tax is based on the home’s value – based on IRS calculations – and not on the increase in the home’s value. If the value of the home does not increase or stays the same then the beneficiary will not have to pay any gift taxes on the home.
Another benefit of QPRT is that tax benefits can be increased if the husband and wife own a house together. Under Treasury Regulations section 25.2702-5(c)(2)(iv) a husband and wife can transfer half of their ownership in the house into two separate QPRTs. Each separate QPRT allows husband and wife owners to live in the residence for a number of years based on the conditions of each QPRT. In the case of a homeowner dying before the QPRT expires, the half in the trust will be put into the estate and subject to land and gift taxes. So what if you want to sell the house that is under QPRT and buy a new house? The QPRT trustee will only sell the old house and buy a new one on behalf of QPRT. If the value of the new home is greater than the old home, then the trustee is required to pay from a separate fund and maintain ownership of that portion of the home.