Forbes Best-In-State wealth advisor Cary Stamp thinks it’s time for you to learn about a sophisticated and little-known estate planning strategy called the Qualified Personal Residence Trust (QPRT). There aren’t many reasons to literally give your house away — in fact this may be the only one!
Hi, I’m Cary Stamp, I’m a Certified Financial Planner and I’m an Accredited Estate Planner and I’m going to tell you today why you might want to give your house away. Yes, why you might want to give your house away.
If you have a substantial estate, one of the estate planning strategies that sophisticated attorneys and planners use is what’s called the Qualified Personal Residence Trust, or what we in the industry refer to as a QPRT. So what is it? Well, you essentially take the home that you live in, your primary residence, and you gift it to a trust, generally, the beneficiaries of the trust are your children and/or grandchildren or future generations. Those folks allow you to live in the home without paying anything for the period of what we call the term of the gift. So in return for giving it away, you get to live there.
The benefit of getting to live there in a house that you give it away is fairly substantial. And the IRS says that if we calculate the benefit of you being able to live there after you’ve given the home away, we reduce the value of the gift that you’re making to your children. So it can reduce or potentially eliminate the gift taxes on giving your house away. That’s number one.
Number two is that the assets can appreciate outside of your estate, which means that if you live in Florida, and you’ve seen real estate values shoot up, and you give away your million dollar home and you live there for another 15 or 20 years, and by the time that you pass away, that house is worth two, three, four or $5 million, those assets are already outside of your estate and will never be taxed again for estate tax purposes. They pass directly to your beneficiaries without any federal estate tax, if you’ve done the QPRT properly. I will give you the caveat that you need a really good attorney to set this up, so make sure that you’re dealing with qualified counsel when you’re figuring out how to give away your house.
Now, what are some downsides to doing this kind of an arrangement with your kids or with your grandchildren? Well, first off, it’s irrevocable. These are very difficult to get out of. So if you decide that you don’t want to do this anymore, you may end up having to buy the house back from the trust. You may not end up being able to get out of the arrangement that you’ve made with your children or grandchildren through this trust.
Secondly is when the term of the trust is up and the next generation fully owns the property through trust, you then need to start paying rent on that property. Well, some people look at this as a downside. Other clients say, great, that means I have to pay rent at a house that I don’t own that I live in, and who’s the rent get paid to? Gets paid to my kids, which means that I further get to reduce the estate that I have that’s going to be taxed, potentially, by the federal government.
Also, a couple of other things to think about. Number one is, in Florida, if you grant your house through a QPRT, generally, there is no change in the status of your property taxes, and you’re allowed to maintain your homestead exemption and keep your lower property taxes. That’s not true in every single state, so make sure that you check that out before you set up this type of an arrangement.
The other thing is that if you do give away your house when you give away property, your heirs or the trust inherit the basis that you paid for that house. So if you paid a million dollars for the house and it appreciates to $5 million, when your children, if they should choose to sell that house, they will pay capital gains tax on the difference between what you paid and what they sell it for.
Now, what does that mean? Well, that means that this type of a strategy is absolutely ideal for families that you believe are going to maintain properties in the family for generations. So if you’ve got a lake house that is a primary residence that’s eligible to be in a QPRT and you want to give that away so that your children can continue to enjoy it for future generations, and there’s not a likelihood that they’re going to sell it anytime soon, that’s an ideal property to put inside of a Qualified Personal Residence Trust.
If you have questions, give us a call. My name is Cary Stamp, I’m an Accredited Estate Planner and a Certified Financial Planner with Cary Stamp and Company. This has been a Principled Wealth Moment.