Qualified Personal Residence Trust (QPRT)
A Qualified Personal Residence Trust (QPRT) is an irrevocable trust under IRC Section 2702 that allows a homeowner to transfer a primary or vacation residence out of their taxable estate at a discounted gift tax value by retaining the right to live in the home rent-free for a specified term, with the remainder passing to beneficiaries at the end of the term.
The QPRT works through the same Section 7520 rate mechanics as the GRAT. The homeowner contributes their residence to an irrevocable trust and retains the right to occupy it for a fixed number of years (the QPRT term). At the end of the term, ownership passes to the trust beneficiaries — typically children or other family members. The taxable gift is the present value of the remainder interest, which is the full fair market value of the home minus the present value of the retained occupancy right, discounted using the Section 7520 rate and the homeowner's actuarially determined probability of surviving the trust term.
The discount can be substantial. For a 65-year-old creating a ten-year QPRT on a $2 million home, the present value of the retained occupancy right may reduce the taxable gift to $800,000 or less, depending on the current 7520 rate. If the home appreciates to $3 million by the end of the term, the entire $3 million has been transferred out of the estate at a gift tax cost on only $800,000. This leverage — taxing the transfer at today's discounted value while removing tomorrow's full appreciation — is the core economic benefit.
The QPRT has significant risks and limitations. As with GRATs, if the grantor dies during the trust term, the full date-of-death value of the residence is included back in the taxable estate under IRC Section 2036, negating all planning benefits. The longer the term, the greater the discount — but also the greater the mortality risk. Estate planners typically calibrate terms based on the grantor's age and health, and may use life insurance to backstop the risk.
At the end of the QPRT term, the grantor no longer owns the home and must either vacate it or negotiate a lease with the trust beneficiaries at fair market rental value. Paying rent creates an additional estate reduction benefit — rent paid to the trust removes additional assets from the estate each year. However, many clients are psychologically uncomfortable with the prospect of paying rent to their children, which can make QPRT planning emotionally complex regardless of its financial merits.
The carryover basis issue is also significant. Assets in a QPRT do not receive a step-up in basis at the grantor's death. Beneficiaries inherit the grantor's original cost basis. For a long-held, highly appreciated home, this can create substantial capital gain upon eventual sale — potentially exceeding the estate tax savings for families in high-income-tax states.