For wealthy individuals or those with large real estate holdings, estate planning can be complicated. After all, we want to protect the value of what we pass on, and we do not want our beneficiaries saddled with unexpected, complicated and expensive tax burdens after we pass. This is why trusts are often part of Texas estate planning, one such trust is the Qualified Personal Residence Trust.
What is a Qualified Personal Residence Trust?
A QPRT is a specific type of irrevocable trust used to separate one’s personal residence from one’s other assets that may go into other trusts to reduce the tax burden that one’s beneficiaries would normally incur upon one’s death. This is done by allowing beneficiaries to reside in the residence for a specific amount of time, thereby reducing the IRS taxes owed to only that amount of time, rather than the entire asset value.
Retained interest versus remainder interest
Residency is broken down between “retained interest” and “remainder interest.” First, the original owner maintains their current residence for a specified period of time. This is called the retained interest in the house. Second, once this period of time is over, the remaining interest is then transferred to the beneficiaries, which is called the remainder interest.
The length of the trust, and the according retained interest and remainder interest periods determine the value of the property for tax purposed. These periods are calculated on the Applicable Federal Rates published by the IRS. Since the owner retained some percentage of the value, the property’s gift value is lower than fair market value. This, in turn, lowers the gift tax, which can also be further reduced by a unified credit.
Dying during the retained interest term
This is actually contemplated and part of QPRT estate planning. When one dies before the term of their retained interest expires, the remaining interest is included in the primary estate and subject to tax, but only that portion of value left in the retained interest term. That remaining retained interest term can be willed to one beneficiary, and then the remainder interest willed to another.
Of course, determining whether this or another trust option is appropriate should be done with a Texas estate planning attorney. Timing can be important to QPRTs, but this type of trust is only for one asset class, which is why getting help with estate planning is so crucial.