What Is a Qualified Personal Residence Trust (QPRT)?

What Is a Qualified Personal Residence Trust (QPRT)?

Let me explain what a Qualified Personal Residence Trust, or QPRT, really is. It's an irrevocable trust that you can set up to take your personal home out of your estate, which helps cut down on the gift taxes you'll pay when passing assets to your beneficiaries.

With a QPRT, you as the owner get to keep living in the property for a set time with what's called 'retained interest' in the house. Once that time is up, the remaining interest goes to your beneficiaries as 'remainder interest.'

The value of the property during your retained interest period gets figured out using the applicable federal rates (AFR) from the IRS, depending on how long the trust lasts. Since you keep a portion of the value, the gift value ends up lower than the fair market value (FMV), which means less gift tax for you. You can even use a unified credit to reduce that tax further.

Key Takeaways

Remember, a QPRT is fundamentally an irrevocable trust. It lets you remove your home from your estate specifically to lower those gift taxes. And the property's value during the retained period is based on those IRS applicable federal rates.

How a Qualified Personal Residence Trust (QPRT) Works

A QPRT becomes really useful if the trust ends before you, the grantor, pass away. If you die before the term is over, the property goes back into your estate and gets taxed. The tricky part is picking the right length for the trust, considering the chance you might not outlive it.

In theory, a longer trust term means a smaller remainder interest for the beneficiaries, which cuts the gift tax even more. But this works best if you're younger and less likely to die before the trust expires.

Important Note on Charitable Remainder Trusts

Just so you know, there are two types of charitable remainder trusts—CRAT (charitable remainder annuity trust) and CRUT (charitable remainder uni-trust)—where the donor gets an income tax deduction based on the present value of the remainder interest.

Example of a Qualified Personal Residence Trust

Let's look at an example to make this clear. Say you're a parent wanting to pass your $500,000 house to your child, but you don't want to move out yet. You set up a QPRT for 10 years to ease the tax burden on your estate.

After 10 years, the house is worth $750,000. Thanks to the QPRT, that $250,000 gain is tax-free. You only pay gift tax on the original $500,000 value in the trust, and even that value decreases over the term.

At the end of the term, you no longer own the house—you have to move out or sign a lease. If you die before the term ends, all tax benefits disappear. There are also rules about adjoining land, what happens if you outlive the trust, or if you sell the home early.

How Is a Qualified Personal Residence Trust Useful?

A QPRT is useful precisely when it expires before you die. If you pass away first, the property gets pulled back into your estate and taxed accordingly.

Do Other Types of Trusts Exist Besides a Qualified Personal Residence Trust?

Yes, there are plenty of other trusts out there beyond the QPRT. For instance, a bare trust gives the beneficiary absolute rights to the assets, including financial ones like real estate or collectibles, and any income they produce, such as rent or interest.

Another is the charitable remainder trust, where you as the donor can give an income interest to a non-charitable beneficiary, with the rest going to a charity. The main types are CRAT and CRUT.

How Does a Charitable Remainder Trust Work?

In a charitable remainder trust, you provide income to a non-charitable beneficiary, and whatever's left goes to a charitable organization. Again, CRAT and CRUT are the two key versions.

The Bottom Line

To wrap this up, a QPRT is an irrevocable trust that lets you remove your personal home from your estate to cut down on gift taxes when you transfer assets to beneficiaries.