how a qualified personal residence trust qprt works
a qualified personal residence trust can be useful when the trust expires prior to the death of the grantor if the grantor dies before the term the property is included in the estate and is subject to tax the risk lies in determining the length of the trust agreement coupled with the likelihood that the grantor will pass away before the expiration date theoretically longer term trusts benefit from smaller remainder interest given to the beneficiaries which in turn reduces the gift tax however this is only advantageous to younger trust holders who have a lower possibility of passing away prior to the trust end date qprt and other trust formsmany different types of trusts exist in addition to a qualified personal residence trust two additional ones are a bare trust and a charitable remainder trust in a bare trust the beneficiary has the absolute right to the trust s assets both financial and non financial such as real estate and collectibles as well as the income generated from these assets such as rental income from properties or bond interest in a charitable remainder trust a donor may provide an income interest to a non charitable beneficiary with the remainder of the trust going to a charitable organization the charitable remainder annuity trust crat and charitable remainder uni trust crut are two types of charitable remainder trusts under two types of charitable remainder trusts crat and crut the donor receives an income tax deduction from the present value of the remainder interest example of a qprtconsider a parent who wants to pass their house which is valued at 500 000 to their child currently the parent does not plan to move out of the house to reduce the tax impact on their estate the parent sets up a qualified personal residence trust for 10 years in 10 years the house increases in value to 750 000 because the house is under a qprt the 250 000 in gains will be tax free in other words the parent will only have to pay gift tax on the 500 000 value of the house that is held within the trust the value of the house also diminishes over the 10 year term the parents don t own the house at all at the end of the term they must leave or enter into a lease agreement and if the parent dies before the end of the trust s term the tax benefits will fail to apply qprts may also have various caveats pertaining to the adjoining land outliving the trust and selling the home before the term s end 