01Write the Irrevocable Trust Agreement
The first step in establishing a QPRT is writing the actual irrevocable trust agreement. You'll need to decide who will serve as the initial and successor trustees, how long you want to retain the right to live in the residence (this is called the "retained income period") before it passes to your ultimate beneficiaries, and then who will be the ultimate beneficiaries of the trust when the retained income period ends. These decisions will be very important since the QPRT is an irrevocable trust and its provisions cannot be easily changed.
02Fund the Trust With Your Residence
The next step is to transfer ownership of your residence into the name of the QPRT. This is done by recording a new deed from your name into the name of the trust in the land records where the property is located.
03Obtain an Appraisal of Your Residence for Gift Tax Purposes
04Report Your Gift to the IRS
The next step is to file a Form 709, United States Gift (and Generation-Skipping Transfer Tax) Return, with the IRS, which will be due on April 15 of the year after you transfer the residence into the QPRT. This is necessary because the transfer of the residence into the QPRT is deemed to be a gift to the ultimate beneficiaries of the trust for federal gift tax purposes. If you live in a state that also has a state gift tax, then you'll also need to file a state gift tax return.
05Go About Your Business as Usual
During the retained income period of the QPRT, you'll go about your business as usual. This means that you'll be able to continue to live in the residence rent free and take all appropriate income tax deductions. You'll also be required to maintain and repair the property for the benefit of the ultimate beneficiaries of the QPRT.
06Transfer Ownership of the Residence to Your Ultimate Beneficiaries
When the retained income period ends, the trustee of the QPRT must transfer ownership of the residence from the name of the trust into the names of your ultimate trust beneficiaries. This is done by recording a new deed from the name of the trust into the names of the trust beneficiaries in the land records where the property is located.
07Pay Fair Market Rent
Once the retained income period ends, you'll need to pay fair market rent if you want to continue to live in the residence full time or if you want to use it periodically such as for vacations. Payment of rent will help to further reduce the value of your taxable estate and pass more of your assets on to your ultimate beneficiaries without using any more of your gift tax exclusion since the rent payments won't be considered gifts to your beneficiaries.
What Is a Qualified Personal Residence Trust (QPRT)?
How to Create a Special Trust for Your Residence
A Qualified Personal Residence Trust, or QPRT for short, is a special type of irrevocable trust that is designed to hold and own your primary or secondary residence and remove its value from your taxable estate.
A QPRT comes with its own benefits and risks, but here are the steps for how to set one up.