What Is a Qualified Personal Residence Trust (QPRT)?

A Qualified Personal Residence Trust (QPRT) is a form of irrevocable living trust designed to reduce the amount of gift and estate tax generally incurred when transferring an asset to a beneficiary. According to the law, the Qualified Personal Residence trust (QPRT) is a suitable legal technique to shield an individual's assets for their beneficiaries and protects those assets from creditors and judgments. An irrevocable trust cannot be changed in any way while the trust is in effect. This helps to guarantee that a judge cannot merely order a person to surrender protected assets to creditors or change the circumstances of the trust which would allow others to obtain the asset.

Once the residence has been transferred to the trust via a properly prepared and executed deed, the transferee(s) retain(s) the right to live in that home for a set number of years. While the owner is residing in the house, no rent would be paid. The owner is responsible for all housing expenses like repairs, real estate taxes, and maintenance fees which is covered by Revenue Procedure 2003-42 [2003-23 IRB 993 section 4 Art. II (B) (2)]. If the owner is alive after that predetermined number of years the trust automatically transfers ownership of the home to the owners' beneficiaries without having to pay estate tax. The beneficiaries can rent the home out to the original owner of the house. The most appealing part of this plan is that paying rent after the QPRT has ended the owner transfers additional assets to their beneficiaries without having to pay any gift or estate tax. Having received the rent money from the parents does not preclude them from giving the money back to the parents. If the house is sold, the proceeds from the sale can be used to purchase another house or other items for the parents as the beneficiaries' desire.

If the residence has appreciated in value since its original appraisal, the gift tax is based on that value of the home - based on the IRS calculations - and not on the increased value of the home. If the home's value does not increase or stays the same then the beneficiaries would not have to pay any gift tax on the home. Another benefit of the QPRT is the tax benefits can be enhanced if a husband and wife own the home jointly. According to Treasury Regulations section 25.2702-5(c)(2)(iv) a husband and wife can both transfer half their ownership in the home into two separate QPRTs. Each separate QPRT allows the husband and wife owners to live in the residence for a set number of years based on the conditions of each QPRT. In the case of one homeowner dies before the QPRT ends, the half that was in the trust would be put into the estate and be subject to estate and gift taxes. So what happens if you want to sell the house that is under a QPRT and buy a new home? The trustee of the QPRT would simply sell the old home and buy a new one in the name of the QPRT. If the value of the new home is greater than the old home, then the trustee would be required to pay out from separate funds and retain ownership for that portion of the house.

Want to learn more? contact us and we can help you!

Should I Create an LLC for my Rental Property?

Should You Create an LLC for Your Rental Property?

by Kyle Wallace

Whether you currently own rental properties or are a homeowner contemplating leasing your own home or purchasing a rental property, it’s important to consider how you should protect yourself. One of the more popular options is to create a Limited Liability Company (LLC) and transfer ownership of that property into the LLC.

The Application Process

Creating an LLC involves filing the appropriate paperwork with the Secretary of State, which will require that the LLC has a member or manager as well as an address where notices can be sent. In addition, LLC filings require a copy of the operating agreement and/or bylaws. These are the documents that specifically state the business financial and operational rules and regulations for the business and its owner. In layman’s terms, it establishes the scope and authority in which the LLC can do business. The initial LLC filing can cost up to several hundred dollars upfront with annual renewal fees. Once your LLC is filed and you have created the operating agreement and bylaws, the protection of your property as an asset is almost complete. To complete the process, the property must be transferred into the LLC, or you must sell the property to the LLC even if the sales price is zero.

Pros and Cons of LLC for Rental Properties

This brings us to the pros and cons of transferring the property into an LLC. Starting with the pros, once your property has been transferred into an LLC, you can insulate yourself from personal liability. The most common example of this is a scenario where someone is injured on your rental property, and they sue for medical expenses and damages. If you own the property in your name, you could be held liable for damages that exceed any insurance policy that you have. Putting the property into an LLC eliminates the personal liability and limits loss to only those assets within the LLC. However, this often requires that each rental property be placed in its own LLC to prevent cross liability between rental properties.

Additionally, an LLC is a pass-through entity for tax purposes. This means that no additional tax filing must be made on behalf of the LLC and the profit or loss is passed directly through to the owner or member of the LLC and that owner can write off many of the business expenses on their personal taxes.

The cons of an LLC are the cost. The average LLC for a rental home, costs more than $150 per year. The annual fees for an LLC must be paid. When those fees are not paid to the state, the LLC will become inactive and cannot dispose of or refinance the property until those fees are brought current. That process can become very expensive as the late and delinquency fees add up.

The second drawback of placing a property into an LLC is that if you plan on financing or refinancing a property that is held by an LLC, lenders tend to be very more demanding about the documentation. Many lenders will not loan money to an LLC unless they have a long history of income and a strong profit and loss statement. Generally, when a lender loans money to an LLC, it will require personal guarantees from the LLC members.

Some Things to Consider

Some additional things to consider when putting a property into an LLC is that said property must be transferred into the LLC by a deed. This means that there has technically been a sale of the property, which can trigger the “due on sale” clause from an existing lender on the property. While this is rare, it could mean that, because the property was transferred or sold, even as a zero-dollar transfer, the lender can call the entire note due and payable immediately.

It is also worth noting that an LLC does not avoid probate. Any corporate ownership that is held by a deceased party member must be transferred through probate. Similarly, any existing lease agreements on a rental property will need to be assigned to the LLC from your name personally if you have transferred a property into an LLC.

Despite some of the shortcomings or challenges with an LLC, many thousands of individuals have chosen to transfer properties into an LLC for the limitation of liability and beneficial tax treatment.

Kyle Wallace is Chief Operating Officer of Driggs Title Agency.