QPRT

Categories: Tax, Real Estate

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.

Related or Semi-related Video

Finance: What is QPRT?1 Views

00:00

and finance Allah shmoop What is a Q Bert No

00:06

Q P Artie What is it Qualified Personal resident's trust

00:11

and basically it's illegal trust into which you put your

00:13

home I eat your residents a k a The are

00:17

there in the Cooper thing for all kinds of beneficial

00:19

tax reasons Well people create Q parts so that they

00:22

can transfer their homes and usually in a tax advantaged

00:25

or low taxi kind of way to their kids Loved

00:28

ones Or you know members of the Justice League Well

00:31

the Golden Ticket in Q Bert is the notion of

00:33

discounted cash flow Are discounting future value to be a

00:37

lower number in its present value that is the value

00:40

of the home is determined by an SS or usually

00:43

not Zillow yet and note that the government has a

00:46

cap or a maximum dollar value that can be transferred

00:50

from one generation to the next without suffering Severe taxes

00:54

like that's around 12,000,000 bucks these days So it's in

00:56

the interest of those with assets to transfer to make

00:58

that value appear to be as low as possible It

01:01

should be conceivable that if the home is to be

01:03

transferred not today but in a decade or even to

01:06

well then that future value of that home could be

01:09

re construed as being worth a lot less than it's

01:11

worth today and the official legal transfer happens in a

01:15

decade or two So it's going to transfer using up

01:17

a lot less of that 12 ish $1,000,000 estate tax

01:21

minimum ceiling there before you really get taxed And this

01:24

all makes sense If you think about real estate in

01:26

the context of well normal commercial real estate like apartment

01:29

buildings in office buildings that is If someone gave you

01:32

an apartment building but told you that you couldn't collect

01:34

any rent from it for 18 years than that building

01:38

would carry a significant value Discount today compared to what

01:42

it would carry were given to the beneficiary this week

01:45

because you collect 18 years worth a rent before the

01:48

other guys begin collecting So going to Cooper the home

01:50

is that essentially given in parts Teo say the beloved

01:53

children of the owners and the value of the asset

01:56

being transferred gets the benefit of what is essentially present

01:59

value or discounted cash flow evaluations such that the government

02:03

allows for the home to retain a flat steady UN

02:06

inflated valuation while for tax purposes well the value of

02:09

the home is discounted Meaningful e In the future for

02:12

example the owners of the home might have a nice

02:14

little pad with a market value today of well $5,000,000

02:17

they're legally allowed to transfer up to 12,000,000 bucks to

02:20

their kids with no estate tax If they just transferred

02:23

the home today well they'd use up well 5/12 of

02:26

their total tax free estate transfer option But the parents

02:29

have other assets beyond the house They'd also like to

02:32

transfer with no estate tax write like stocks and bonds

02:35

and maybe some other real estate Well this is where

02:37

the Q part comes in Trying to mitigate much of

02:39

the $5,000,000 in assess value of the home by discounting

02:43

its transfer value a decade and change into the future

02:47

So let's say the transfer value was pegged at 15

02:49

years from now The discount rate of 5% per year

02:51

Compound ID Will the duration and years in the discount

02:54

rate er set by a government formula based largely on

02:57

what government bond paper is trading at in a given

03:00

time period and the age of the parents and other

03:02

expected structural life issues and life expectancy and a whole

03:06

bunch of other elements get a bald in that mush

03:08

pot of regulatory compiling So the government comes up with

03:11

a discount rate or a number so that $5,000,000 house

03:15

living inside of a queue pert with children still in

03:17

grammar school doesn't need to be traded To them is

03:20

an asset for say 15 2030 years Something like that

03:23

Big note You must be alive for the entire vesting

03:27

period of your Q Bert If you die well basically

03:30

then everything reverts back to a fully taxed state and

03:33

in some states hi California that fully tax status can

03:37

be painful right You don't get the estate waiver discount

03:39

minimum there So that home then well we're guessing here

03:42

is discounted at a rate of $5,000,000 divided by one

03:45

plus point No Five to the 15th Power right 15

03:48

years compounded If you do the math there that's roughly

03:50

two and change to 20.1 something like that meaning that

03:53

the transfer price of that $5,000,000 home to the children

03:57

then takes up well instead of 5/12 of the tax

04:00

free transfer It takes up something closer to 2/12 of

04:04

the tax free estate transfer rights only using up two

04:06

of the 12,000,000 Because the discounted or present value of

04:10

the home inside of Cuba it has gone from being

04:12

worth $5,000,000 current market value to being $5,000,000 divided by

04:16

roughly two and change or about two point 4,000,000 in

04:19

future assessed estate transfer value Yes that's the fancy phrasing

04:24

So yes there are costs in setting up a Q

04:26

Bert But usually the benefits of the kid's vastly outweigh

04:28

the 10 or 20 grand and change and setting one

04:30

of these puppies up especially if the dough is on

04:33

one of this kind of big multi $1,000,000 scale and

04:36

the ever big benefit Well you can actually live in

04:38

the home while you have in theory given it away

04:41

assuming you can you know still do stairs Anyway when

04:44

you are dealing with a homeowner who has that kind

04:46

of cash well there's always a chance he might be 00:04:48.862 --> [endTime] this guy Yeah oh

Find other enlightening terms in Shmoop Finance Genius Bar(f)