Skip to content
Round Logo — Smalller size
Wills, Trusts, & Estates Prof Blog
Formerly Hosted by the Law Professor Blogs Network

Qualified Personal Residence Trust Benefits Publicized

By Gerry W. Beyer

Today’s New York Times explains the reasons for a person to give serious consideration to the formation of a qualified personal residence trust (QPRT).  See Damon Darlin, With a Little Estate Planning, Your House Can Stay in the Family, NY Times, Jan. 21, 2006.

Here are a few excerpts from the article:

The QPRT works best for those people who expect to live another decade or so. The longer the term of the trust, the more beneficial the gift is to the children. A $1 million home in a three-year trust saves about $147,000 * * * but one stretching 18 years saves almost $850,000.

Here’s the big catch: The QPRT helps you sidestep the taxman, but you have to outrun death to get the benefit. If the parent dies before the trust expires, the children have to pay the estate tax on what the value of the house was when the parent died.  * * *

QPRT make the most sense when interest rates are high. The higher the interest rate, the greater the discount, which, in turn, increases the tax savings. When a home is put into the trust its value is not the current value of the house, but what is called the “present value” of the future gift – a deep discount. For instance, a $1 million home in a 12-year trust is valued at $370,460. The same house in an 18-year trust would be valued as a gift at only $185,400. * * *

The government sets those values reasoning that the heirs are not getting the value of the house right then. The money they would have received is worth less in the future, hence the discount.  * * * Of course, that ignores the possibility that the house increases in value. * * * In the event that prices drop, a house would have to depreciate a lot – say by half – before the trust makes no economic sense. * * *

If the parent outlives the trust, the parent can continue to live in the house by paying the children fair-market rent. Turning their progeny into their landlords may be disconcerting for some parents. If they can foresee conflicts, maybe it’s time to start spending so the last check written bounces or, alternatively, stick the greedy ingrates with the estate tax.