Qualified Personal Residence Trust | Maryland and Federal Law Provide Strong Tax Incentives to Certain Local Real Estate Owners
A Qualified Personal Residence Trust (QPRT) is a useful estate planning tool for many people, especially the wealthier among us. The problem that the QPRT attempts to resolve is estate tax, which is taken out of your estate after you die, and gift tax, which is levied on people who try to avoid estate tax by giving away their property before they die.
Of course, estate tax is irrelevant for most people, since the federal estate tax exemption is $5.34 million, far more than the value of the average probate estate. It’s a big problem if your estate is worth more than that, however.
The estate tax rate is 40 percent of every dollar of your estate that exceeds the estate tax exemption – over a million dollars on a $10 million estate, for example. To add insult to injury, Maryland also levies an estate tax of up to 16 percent on in-state real estate.
Estate tax is a huge problem for wealthier individuals who don’t want Uncle Sam to serve as their biggest heir. The QPRT is designed to remove the value of a residence from the value of your probate estate in the hopes of reducing or even eliminating your estate and gift tax liability.
How a QPRT works
A QPRT is a particular type of irrevocable trust in which the trust asset consists of your residence. Strictly speaking, once the trust I established it is the trust, not you, that owns the residence. Eventually your residence will be owned by whoever you designate as beneficiary.
Establishing a QPRT doesn’t even mean you have to move out – the terms of the trust can be structured to give you the right to live there until you die (and it can also grant your spouse the right to live there until he/she dies, even if you predecease your spouse). After the death or you or your spouse, ownership of your residence will be transferred to the beneficiary you selected in the trust instrument.
What exactly constitutes a “personal residence” for estate and gift tax purposes?
For the purpose of setting up a QPRT, a “personal residence” can consist of:
- Your main residence;
- A vacation home; or
- A main residence of vacation home in which you own an undivided fractional interest (a tenancy in common arrangement, for example).
You are only allowed to set up two QPRTs in your lifetime, and if you set up both, then one of them must be your main residence. In other words, you can set up:
- One QPRT for your main residence;
- One QPRT for your vacation home; or
- Two QPRTs, one for your main residence and one for your vacation home. What you cannot do is set up two QPRTs for two vacation homes.
For more information on QPRTs, or to discuss any other estate planning matter, contact us to schedule a consultation. We have offices located in Columbia, Rockville, Washington, D.C. and Northern Virginia.