Are There Benefits to Using a Qualified Personal Residence Trust to Minimize Estate Taxes?

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For individuals who own their home or even more than one residence, a qualified personal residence trust (QPRT) may be a viable option to help them minimize future estate taxes.

However, individuals considering establishing a QPRT as part of their estate plan
should take time to be informed about the pros and cons of this strategy. Even though a QPRT helps to remove the value of your home, the property must be put into an irrevocable trust.

Michigan law dictates that an irrevocable trust cannot be changed, amended, altered, or canceled after its creation. Therefore, if an individual places their home into an irrevocable QPRT, it must stay there until the terms of the trust have been satisfied, as specified in the trust, or if legal issues arise.

However, many individuals feel the benefits outweigh the risks involved and utilize a QPRT for the advantages they provide to their beneficiaries.

If you would like to learn more about the benefits of a QPRT, contact our law office and ask to schedule a free initial consultation to discuss your needs.

What is a Qualified Personal Residence Trust (QPRT)?

The grantor creates a qualified personal residence trust (QPRT) and then places their primary or secondary residence into the irrevocable trust. The grantor can then take advantage of the gift tax exemption and appropriate income tax deductions.

The grantor determines how long they will live in and retain possession of the residence. Once the term is up, the beneficiaries will obtain possession of the residence. During this time, the grantor lives in the home rent-free. However, the grantor is responsible for paying for the everyday upkeep of the house as well as property taxes.

Because the residence has been placed in an irrevocable trust, it is no longer considered the grantor’s personal property but now that of the trust. Due to its benefits, many individuals place their homes into a QPRT as part of a well-crafted estate plan.

However, certain risks are associated with placing a residence in a QPRT. For more information about how a QPRT may benefit you, it is best to speak with a qualified attorney who can provide you with more information.

What Are the Cons Associated With a QPRT?

Even though there are many tax benefits associated with a QPRT, there are also many cons that individuals should be mindful of before placing a residence in an irrevocable trust.

Some of the most common issues that can complicate a QPRT include:

  • The grantor must outlive the term of the trust. If the grantor dies before the term of the trust ends, the residence will revert back to the grantor’s estate as if it were never part of a QPRT. In turn, any gift tax exemption benefits will be lost.
  • The grantor cannot refinance the property to obtain a second mortgage because they are not considered the owner. Instead, the QPRT that has been established owns the home.
  • If the residence has a mortgage, a portion of the mortgage payments are considered gifts that count toward the gift tax exemption.
  • Once the specified term of the QPRT ends, the grantor must turn over ownership to the specified beneficiaries. The grantor is permitted to continue to live in the home. However, the grantor will have to rent comparable to similar properties in the area.

One of the most crucial factors to consider when deciding whether a QPRT is feasible is the grantor’s current health and life expectancy. Understanding these factors can help determine the appropriate term length of the QPRT.

Can a QPRT Be Revoked?

Because a QPRT is part of an irrevocable trust, it is challenging to revoke or modify. However, often situations change, or other financial considerations arise that make it necessary to consider revoking or terminating a QPRT.

In such cases, there are two options for early termination which include:

  • The trust agreement allows for the trust to be terminated. In this case, the property or sale proceeds will be returned to the grantor.
  • The second option involves selling the residence and either a new home being purchased, or the cash being invested. If the cash is invested, the grantor receives an annuity for the remaining time on the QPRT term. However, after the term expires, any remaining trust assets will be distributed to beneficiaries.

If you or a family member is considering terminating a QPRT, you must consult an experienced attorney who can help you make an informed decision. Although establishing a QPRT can provide excellent tax benefits, making changes can be difficult.

Contact our law firm to learn more about how we may be able to help.

Can Your Law Firm Help Me Establish a Qualified Personal Residence Trust?

If you are interested in creating a qualified personal residence trust, you must obtain qualified legal representation. A QPRT provides many excellent benefits to both the grantor and their beneficiaries. However, it is also essential to understand all of the risks involved.

Our law firm is dedicated to helping individuals and their families find innovative ways to help them create estate plans that work for their needs. When clients come to us inquiring about a QPRT, we help them understand the risks and benefits. As a result, many individuals determine that a QPRT is not suitable for them.

However, over the years, many clients have created and used QPRTs to help them minimize estate taxes and reap the other benefits associated with an irrevocable trust.

If you want to create a QPRT or learn more about the benefits, contact Estate Planning & Elder Law Services, P.C. of Northville, MI at 888-663-7407 to schedule a free no-obligation consultation.

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