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Estate tax concern: Consider a qualified personal residence trust

On Behalf of | Aug 18, 2021 | Estate Planning |

Some taxpayers are stuck paying the government even after they die. Certain high-net worth individuals are subject to what is known as the estate tax. This post-mortem tax takes a share of all estates valued at over $5.34 million and carries a maximum rate of over 40 percent.

North Carolina tax professionals have devised clever tactics to avoid the estate tax and the qualified personal residence trust or “QPRT” is among the most popular.

Before exploring the benefits of a QPRT, it’s important to note that the IRS includes the value of your home when assessing the size of your estate. It determines home value by estimating what the house would demand on the open market. Remember, the size of your estate determines your estate tax exposure.

You may be thinking, “can’t I just give my house to my heirs before I die?” Sure! However, this would be considered a gift by the IRS, and you would be stuck paying the dreaded “gift tax.” The gift tax would be taken as a percentage of your home’s value.

QPRTs let you escape from the gift/estate tax conundrum. Here’s how:

A trustor creates a QPRT by conveying his home into a trust. The trust allows him to reside in the house for a term. The beneficiary only obtains full possession of the house when this term expires.

Although the beneficiary is not granted full possession of the house until the term ends, the house is gifted to them shortly after the trust is created.

Here’s the rub: the QPRT drastically reduces the house’s market value at the time the gift is made. After all, who would want to buy a house knowing the seller is allowed to live in it 10 or 15 years after the date of sale? This drastically reduces the trustor’s gift tax liability.

But that’s not all. The trustor’s estate tax liability is also mitigated because, prior to his death, he transferred ownership of the house to the beneficiary. Therefore, the house will no longer be assessed as part of his estate.

QPRTs require professional help

QPRTs are complicated, and you should always seek an estate lawyer’s help when creating one.

When it comes to complex tax strategies, there are externalities and residual consequences most people would never contemplate. A lawyer understands the nuances of the law and can identify issues before they arise, structuring a bespoke strategy around your unique interests.

North Carolina residents shouldn’t hesitate to reach out. If cost is a concern, many lawyers offer a free initial consultation at no out-of-pocket cost to the client.