Understanding Qualified Personal Residence Trusts
Did You Know? Did you know that almost 70% of Americans currently don’t have an estate plan? It’s shocking but true! According to CNBC, a 2022 survey reported the following reasons many individuals have neglected to put together an estate plan: • 40% reported that they haven’t yet made the time. • 33% said they don’t have enough assets to place into a will. • 13% felt that the estate planning process is too expensive. • 12% said that they aren’t sure how to achieve a will. At Dahl Law Group, we are here to alleviate these concerns and streamline the process to ensure that your assets, legacy, and wishes are passed down to future generations exactly how you’d like them to be!
A Key Tool in Estate Planning
Effective estate planning utilizes tools to save money by avoiding the heavy tax burden of transferring assets to beneficiaries. Homeowners often face a significant tax bill when transferring properties to heirs because their home is among their most expensive assets. This is where a Qualified Personal Residence Trust (QPRT) helps. WHAT IS A QUALIFIED PERSONAL RESIDENCE TRUST (QPRT)? A QPRT is a type of irrevocable trust designed to exclude your personal home from your estate, which, in turn, lessens the estate/gift tax burden when the home is transferred to your beneficiary on a specified date. HOW IS THE GIFT VALUE OF THE PROPERTY CALCULATED? It’s important to understand that the home’s entire value is not excluded from your estate. The resident retains a partial interest in the home, which means retaining partial value in the estate. To calculate this, apply the applicable federal rates (AFRs) when the home is put into the QPRT. TERM MATTERS WITH QPRT If you pass away before the term of the QPRT expires, the home will be transferred back into your estate, eliminating the potential tax relief. Choosing the right term for your QPRT is imperative. Are you confident you are healthy enough to survive the length of the trust? If the trust expires and you would still like to live in the home, you can enter into a lease agreement with whoever takes ownership of the home. WHEN IS A QPRT APPROPRIATE? If you believe your home’s value will increase significantly and want to transfer ownership to your children while you’re still alive, a QPRT is right for you. This allows you to avoid incurring a tax bill for the capital gain of the home’s increased value. QPRTs are also beneficial for individuals with a high-value estate who need to lower its value to avoid the taxes that come with it. You can reduce the estate tax incurred in passing your home to your chosen heirs while still ensuring you have a place to live during your lifetime. At Dahl Law Group, we consistently have these conversations with our clients and aid them in making the right choices for their estate, finances, and beneficiaries. Let us help you make the right decision about your personal residence.
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