Kathryn T. Joseph & Associates, Inc.

Using the QPRT to reduce estate tax

While the federal estate tax exemption is high enough that few people need to be concerned about it, others worry that the exemption, which in 2016 is $5.45 million for an individual, might one day be reduced or even eliminated. Ohio homeowners who are in the latter group might want to consider creating a qualified personal residence trust.

Using a QPRT, the homeowner transfers the title to the residence to the trust for the benefit of one or more named beneficiaries. The grantor is then able to live in the residence rent-free for the amount of time specified in the trust document. It is necessary that the grantor live in the residence the entire time. When the specified period of time comes to an end, the grantor must then pay rent to the beneficiary in order to continue living in the house. For gift tax purposes, the QPRT allows the home to be discounted in value to reflect that the beneficiary must have to wait to take title to it.

There are a few disadvantages to the QPRT. One is that if the grantor dies before the period specified in the trust comes to an end, then the residence becomes part of the estate at its current value. Another is that the tax basis of the home to the beneficiary will be the grantor's basis, and thus on a future sale there may be a high capital gains tax. Had the home passed instead through the grantor's estate, the basis would have been stepped up to the home's fair market value on the date of death.

People may create trusts for a variety of reasons beyond avoiding estate tax. A trust might be set up to ensure that minor children are provided for or to help relatives who have special needs. An estate planning attorney can recommend documents that are suitable for a client's needs.

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Kathryn T. Joseph & Associates, Inc.
Executive Commons West
29425 Chagrin Blvd.
Suite 305
Cleveland, OH 44122

Toll Free: 888-335-6650
Phone: 216-245-0504
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