by: John B. Palley, Attorney
Estate planning attorneys love acronyms: Q-TIP, Q-DOT and Q-PRT are three relatively well known types of trusts. Others include ILIT, CRT, GRAT, GRIT and A/B. Though all of these initials are good estate planning tools to consider the QPRT, or QUALIFIED PERSONAL RESIDENCE TRUST is a vastly underutilized tool in my opinion. It can offer great tax savings and asset protection.
A QPRT is an irrevocable trust whereby the grantor gives away their house to their chosen beneficiaries. This is quite often a parent (or parents) giving their home to their children but there is no requirement that people be related. A QPRT is a great estate planning tool for many reasons but two stand out as being the biggest:
- Reduced taxation;
- Asset protection.
Well, in my 15+ years doing estate planning work I don’t think any client has refused the idea of lowering their taxes. Likewise in that 15 years the concept of asset protection has become more and more important as our litigious society develops. Yes, you can insert rude comment about ambulance chasing lawyers here but, whatever the reason, it’s a fact that we all have to worry about lawsuits and protect ourselves!
With a QPRT you deed your personal residence, or one other house (non-rental vacation home for example) to a trust but you retain the right to live in your home for life. At the end of a pre-determined term of years your house transfers, at the least ownership, to your chosen beneficiary. The appreciation of that house during those years goes to your kids along with the house. As you can see with real estate prices historically low, at the time of this writing, it’s an extra good time to do a QPRT.
The moving of appreciation out of your estate along with a special way to calculate the gift make a QPRT a dynamite way to transfer a house. In simple terms the special calculation of the gift “value” factors in the home’s actual value but is reduced to the present value of a future interest. Was that economics 101 when they talked about the idea that one dollar today is worth much more than one dollar in 15 or 20 years? The same simple concept applies to a QPRT. You are not giving away a present gift but rather a future interest. That future interest thus has less value than if the gift were done today.
You say you don’t really have much of an estate tax issue so are not worried about the above tax savings. Ok, do you like the idea of protecting your house from potential creditors? Most people, whether they like it or not, realize they will likely get sued one day. Wouldn’t you sleep better, during that time, if your house were in a creditor protected trust? You don’t need to answer because I KNOW the answer! Lawsuits are out of control and we all need to take reasonable actions to protect our assets. Our personal residence is usually our most prized possession so shouldn’t you take action to protect it!?
While nothing is impervious to creditors a QPRT provides a nice barrier to potential creditors. All the general concepts of asset protection apply and you have to be careful not to commit a “fraudulent” transfer but your attorney can help you with that. A QPRT is a perfect asset protection device because it is “just estate planning” that happens to have some inherent asset protection built in. You can read my asset protection page for more information about that.
Oh ya, I forgot to mention the cost is very reasonable and there is no on-going issues as some other estate planning tools cause. You pay the attorney fee plus an appraisal for your home. Not a lot of money in comparison to the potential tax and asset savings you achieve!