A QPRT is a more creative option that allows the transfer of real property to heirs utilizing a trust arrangement. An irrevocable trust is created and real estate, typically a vacation property or secondary home, is gifted into the trust. The parent (transferor and trustee) can still use the property for a fixed period of time (which should be set up to expire prior to the death of the homeowner). This allows the parent to have a retained interest in the property.
After a specified date, the transferring parent no longer has any interest in the property and the property interest passes to the named trust beneficiaries. The property can be distributed outright and the QPRT can be dissolved, or the property can pour over into another trust to be managed for the benefit of the adult children. If the parent wants to continue to use the property, they would have to pay fair market rent to the trust.
This is typically a high-net-worth estate tax planning strategy. After the transfer of real estate, the fair market value increases and future appreciation is removed from the estate and not subject to estate and gift taxes. A gift tax return would need to be filed to record the gift, although the value of the gift to the trust is calculated for transfer purposes based on the fair market value of the property minus the retained interest of the parent at the time of transfer. The longer the term allowing for the retained interest, the greater the reduction in the gift tax. A common time frame for the term is 10 to 15 years. Thus, a transfer of property to heirs occurs utilizing less of the available estate and gift tax exemption than if the gift would take place at passing through an inheritance. This is a complex arrangement but can effectively check a number of boxes for the higher
net worth individual or couple that has the objective of taking a second property and passing full ownership to their heirs during their lifetime, while using less of the available lifetime exemption discussed in extensive detail above.