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Can a Qualified Personal Residence Trust (QPRT) in California Lower Your Estate Tax?

What is a Qualified Personal Residence Trust, and How Can It Help Me?

A qualified personal residence trust (or QPRT) is a valuable estate planning tool that can be highly beneficial if you transfer your residence to your heirs but want to minimize the gift and estate taxes they must pay.

Forming a QPRT commonly involves having a professional estate planning lawyer draft and execute an irrevocable trust. As the trust’s grantor, you would then transfer your personal residence directly into the trust. This transfer removes your primary residence from your overall estate, thereby lowering your estate’s taxable value, which usually results in substantial estate tax savings.

This transfer of real property (your family home) is considered a gift to the recipients, typically your immediate family or heirs. The value of your home equals the amount of the gift but factors in your (the grantor’s) retained interest in the house for a specified period.

The qualified personal residence trust has a unique structure that allows the grantor to continue living in the property during the trust’s duration while reducing the amount of its estate and gift taxes.

As stated, the QPRT is a unique estate planning tool that allows you to gift real estate, continue living in the home, and realize significant estate tax savings.

It’s critical to note that the grantor must outlive the trust term. If the grantor does not survive, the property reverts to being part of the grantor’s taxable estate, valued at its current market value.

Most knowledgeable estate planning lawyers will reduce this risk using multiple QPRTs, one for each spouse. This significantly reduces the chances of your primary residence being moved back into the rest of your taxable estate.

What Are Examples of Direct Advantages of Forming a QPRT?

Of course, just how beneficial a QPRT is to you depends on your financial and familial situation.

Generally, though, there are certain benefits you can predict due to using this tool. The first and most obvious is the reduction of the taxable value of your estate by removing your principal residence from the overall mix. This will always result in substantial estate tax savings.

This fact is even more important to you if you have a high net worth and your estate exceeds the value of the lifetime exemption. The price of real estate in California is extremely high, and removing your home from the estate may save you hundreds of thousands or even millions of dollars in federal gift and estate taxes.

One of the other valuable benefits is that even though the asset is legally removed from your estate, you and your family can still live in the home for the duration of the trust term.

A lesser-known but notable benefit of using a QPRT is protecting this critical asset.

A QPRT is an irrevocable trust, and any assets held in this trust may be protected from creditors or legal judgments. This provides another layer of security for you and your family.

Additionally, upon the expiration of the trust’s term, your home (or other assets in the QPRT) would pass to your heirs without being subject to estate taxes, so more value would be passed on to them.

If I Have More Than One Home, Can I Transfer Those Properties to a QPRT?

Simply put, under almost all conditions, you cannot. Usually, you can only have no more than one home in a single QPRT.

That said, in many cases, you can set up two QPRTs and transfer one home into each. If you’re a married couple, you may be able to transfer up to three homes total.

Also, a QPRT can hold cash if you are in the process of purchasing a home. However, the purchase must occur within three months of the cash transfer.

A QPRT can also hold cash for up to six months if you have to pay specific trust expenses, such as mortgages or improvements to your home. There are also unique rules you must follow if your home is sold.

Some of the things you must do to move your home to a QPRT are:

  • Your home must first be professionally appraised.
  • Your estate planning lawyer would execute a written trust agreement and transfer your home’s title to the QPRT.
  • Your lawyer would then file a gift tax return and pay the tax, if applicable.
  • You could then live in the home for the entire trust term.
  • At the end of the trust term, you may have to execute a written lease and pay rent if you continue to live in the home.

Of course, if you’re considering a QPRT, the first thing to do is to consult with a well-versed and experienced estate planning law firm familiar with this exceptional tool; only then will you know if it fits your needs.

Is There Any Downside to Forming a QPRT?

Like any other legal tool, a Qualified Personal Residence Trust does offer significant benefits to your estate plan, but there is always some downside.

For example, once you’ve transferred the property into the trust, you lose control over it; depending on your plans, etc., this must be considered.

Also, once your home is transferred into the QPRT, if you must sell or mortgage it, you must get the beneficiaries’ permission.

Additionally, putting your home’s deed into the QPRT will allow you to receive gift tax savings; however, the beneficiaries will usually pay capital gains tax if they sell the house.

The key factor to remember is that all estate planning tools must be tailored to your situation. This can only be done efficiently and rationally by getting the detailed advice you need from a qualified, experienced, and knowledgeable Californian estate plan lawyer familiar with the QPRT and other tools at their disposal.

I Need More Information In QPRTs; How Should I Proceed?

As stated previously, all estate plans differ, and the job of your skilled and thorough estate plan lawyer is to find the best solutions that fit your unique needs. So, the only rational path to take is to consult an informed estate planning lawyer and decide what estate planning tools fit your needs, including a QPRT.

The knowledgeable, passionate, and well-versed estate planning lawyers at Celaya Law have assisted countless California clients in finding the right options to protect their assets and families upon their death. Call them today at (707) 754-0977 and get the peace of mind that comes with having caring professionals help secure your family’s and heirs’ future.

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