Qualified Personal Residence Trust (QPRT)

A Qualified Personal Residence Trust (QPRT) is an irrevocable trust that allows a homeowner to transfer their personal residence to beneficiaries (typically children) at a significantly reduced gift tax cost while retaining the right to live in the home for a specified number of years. QPRTs are a well-established estate planning technique for reducing the taxable estate by removing the home — and all its future appreciation — from the grantor's estate.

35 steps across 7 sections

1. How It Reduces Estate Taxes

  • Discounted gift value: When you transfer your home to the QPRT, the taxable gift is not the full fair market value of the home. Instead, it equals the home's FMV minus the value of your retained ri...
  • Removal of future appreciation: Once the home is in the QPRT, all future appreciation occurs outside your taxable estate. If the home is worth $1 million at transfer and $1.8 million when the trust...
  • Leveraging the gift tax exemption: The discounted gift value uses less of your lifetime gift tax exemption ($15 million per person in 2026, made permanent by the OBBBA), leaving more exemption for ...

2. Retained Income Period

  • The grantor specifies a fixed term of years (e.g., 10, 15, or 20 years) during which they retain the right to live in the home rent-free.
  • During this period, the grantor continues to pay property taxes, insurance, and maintenance as if they still own the home.
  • The term length is a strategic decision: longer terms = larger gift tax discount but also higher risk (see below).
  • Common terms range from 10 to 20 years, depending on the grantor's age and health.

3. Gift Tax Calculation

  • Fair market value of the home at the time of transfer (requires a qualified appraisal).
  • Section 7520 interest rate (published monthly by the IRS; based on 120% of the mid-term applicable federal rate).
  • Grantor's age at the time of the transfer.
  • Length of the retained term .

4. Risk: Dying During The Trust Term

  • If the grantor dies before the trust term expires, the entire value of the home is pulled back into the grantor's taxable estate as if the QPRT never existed.
  • The gift tax exemption used for the original transfer is wasted (though it is restored to the estate).
  • The beneficiaries do receive a stepped-up basis in the home (a silver lining), but the estate tax savings are completely lost.
  • Choose a term the grantor is very likely to survive (consider health, family longevity).
  • Use actuarial tables and a margin of safety.
  • Some planners create two sequential QPRTs with shorter terms rather than one long-term QPRT.
  • Purchase term life insurance to cover the estate tax exposure if death occurs during the term.

5. Setup Process

  • Consult an estate planning attorney experienced with QPRTs.
  • Get a qualified appraisal of the residence.
  • Choose the trust term based on age, health, and risk tolerance.
  • Draft the QPRT trust document (must comply with IRS regulations under IRC Section 2702 and Treasury Regulation 25.2702-5).
  • Transfer the home's title to the trust (deed the property to the QPRT).
  • File IRS Form 709 to report the gift.
  • Continue living in the home and paying all expenses during the trust term.
  • At term expiration: The home passes to the beneficiaries. If the grantor wants to continue living there, they must execute a fair market lease and pay rent to the new owners (which is actually an a...

6. What Happens After The Term

  • The home transfers outright to the beneficiaries or stays in a continuing trust for their benefit.
  • The grantor must move out or pay fair market rent to the beneficiaries. Failure to pay rent causes the IRS to include the home in the grantor's estate (defeating the entire purpose).
  • Rent payments are not tax-deductible for the grantor but are taxable income to the beneficiaries.
  • The rent payments serve as an additional wealth transfer mechanism (money flows from the grantor's estate to the beneficiaries).

7. Special Rules And Limitations

  • A person can only place two personal residences into QPRTs (a primary home and one vacation home).
  • The residence must be the sole asset of the trust (with limited exceptions for cash needed for initial expenses).
  • If the home is sold during the trust term, the proceeds must be used to purchase a replacement residence within 2 years, or the trust converts to a Grantor Retained Annuity Trust (GRAT).
  • QPRTs cannot hold a cooperative apartment in some jurisdictions due to transfer restrictions.
  • The grantor cannot be a beneficiary of the trust after the term expires.

Common Mistakes

  • Choosing too long a term
  • Failing to pay fair market rent after the term
  • Not getting a proper appraisal
  • Ignoring the Section 7520 rate environment
  • Transferring a home with a mortgage

Pro Tips

  • Best candidates
  • Higher interest rate environments favor QPRTs
  • Consider two shorter QPRTs instead of one long one
  • The post-term rent payments are a feature, not a bug
  • Combine with other strategies

Sources

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