QPRT

Well, it’s a:

Qualified
Personal
Residence
Trust

Basically, a legal trust into which you put your home, i.e. your residence, a.k.a. the R in QPRT, for all kinds of beneficial tax reasons. People create QPRTs so that they can transfer their homes, usually in a tax-advantaged or low-tax way, to their kids, loved ones, or, uh, members of The Justice League.

The golden ticket in a QPRT is the notion of discounted cash flow. That is, the value of the home is derived by an assessor. The home is then essentially given in parts to, say, the beloved children of the owners, and the value of the asset being transferred gets the benefit of what is essentially present value, or discounted cash flow valuations, such that the government allows for the home to retain a flat, steady, uninflated valuation...while, for tax purposes, the value of the home is discounted meaningfully into the future.

For example, the owners of a home might have a nice little pad with a market value today of $5M. They are legally allowed to transfer up to $11M to their kids with no estate tax. If they just transferred the home today, they would use up 5/11 of their tax-free estate transfer option. But the parents have other assets beyond the house they would also like to transfer with no estate tax. This is where the QPRT comes in, trying to mitigate much of the $5M in assessed value of the home, by discounting its transfer value a decade and change into the future.

Let’s say the transfer value was pegged at 15 years from now, with a discount rate of 5% per year. The duration in years and the discount rate are set by a government formula, based largely on what government bond paper is trading at in a given time period, and the age of the parents, and other expected structural life issues, like life expectancy and other elements. So that $5M house living inside of a QPRT, with children still in grammar school, doesn’t need to be traded to them as an asset for, say, 15 years. Big note: you must be alive for the entire vesting period. If you die, everything basically reverts back to a fully taxed state and, in some states (hi, California), that can be painful.

So that home is discounted at a rate of $5M divided by (1 + .05) ^15...or roughly 2.1, meaning that the transfer price of that $5M to the children then takes up (instead of 5/11 of the tax-free estate transfer) something close to only 2.3/11 of the tax-free estate transfer, because the discounted or present value of the home inside of the QPRT has gone from $5M current market value to being $5M divided by roughly 2.1, or about $2.4M in assessed estate transfer value.

Yes, there are costs in setting up a QPRT, but usually the benefits to the kids vastly outweigh the $20,000-and-change in setting one of these up, especially if the dough is on this kind of scale.

And the other big benefit? You can actually live in the home while you have, in theory, given it away. Assuming you can, um, still do stairs.