Estate Planning

Estate Planning for Your Vacation Home

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by Alli Thomas

Apr 14, 2021

Several years ago, my mother’s lifelong dream came true: she and my father purchased a condo on a beach block at the Jersey shore.

We spent some time over spring break at their condo with them, and the topic of how to keep this treasured getaway property in our family came up in conversation during our Sunday morning breakfast.

One option that my parents will be looking into is establishing a qualified personal residence trust, or QPRT. If you or your family are also interested in sheltering a beach house, cabin, or mountain retreat, read on.

 

What is a Qualified Personal Residence Trust?

A qualified personal residence trust is an estate planning vehicle that allows a homeowner to place property into the trust while keeping the ability to live in that home for a specified amount of time. In most cases, QPRTs are set up to allow the homeowner to reside in the home for the remainder of their life. The homeowner may transfer either their principal residence, vacation home, or an undivided fractional interest in either type of property into the QPRT.

The IRS defines a vacation home as a residence used the greater of fourteen days per year or 10% of the days rented to others per calendar year.

A QPRT is an irrevocable trust. This means that, once it has been established and property has been transferred into it, it may not be dissolved or revoked.

 

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What are the advantages of establishing a QPRT?

A QPRT allows the homeowner to transfer property to their beneficiaries at a lower gift tax rate and remove an asset expected to appreciate in value from his estate.

It also permits the homeowner to continue using the residence, free of rent, for the term specified in the trust agreement (also called the retained income period).

The grantors of the trust may name themselves as trustees, which allows them to retain control of the trust through the end of its term.

 

Are there any disadvantages?

The biggest risk of a QPRT is that the grantor may die before the end of the trust’s term. If this happens, the property will be included in the grantor’s estate for tax purposes–undoing all the tax benefits of establishing the QPRT in the first place.

Conversely, If the grantor lives beyond the expiration date of the retained income period, the property will still pass to the beneficiaries of the trust, and the grantor must begin paying a fair market rent to the beneficiaries if they wish to continue using the property. Otherwise, the property will revert back to the grantor’s estate for tax purposes.

A QPRT can be an excellent estate-planning tool; however, it is also a complicated vehicle that is best explored with the guidance of an expert. I recommended that my parents consult with an experienced financial planner to find out whether a QPRT is right for them and their vacation home. If you (or your loved ones) have the same questions, and would like a free, no-obligation consultation with a financial advisor, click here to make an appointment.

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Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k) administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

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