A qualified personal residence trust (QPRT) is a special type of irrevocable trust that is designed to hold your primary or secondary residence and remove its value from your taxable estate. As an irrevocable trust, it's is a type of estate plan in which the terms and beneficiaries cannot be changed once the document is created.
A QPRT allows the removal of a home from the estate and will reduce the gift-tax burden on the grantor of the property. As with all products, a QPRT comes with its own benefits and risks. There are also specific steps you must take to set one up.
What Is a Qualified Personal Residence Trust?
A QPRT is a trust that allows you to transfer your primary or secondary home to a future beneficiary with gift tax savings. Once you put the residence in the QPRT, you can stay in the house until the specified date, at which time you will transfer ownership to the beneficiary. Any value the home accrues between the time you open the trust and transfer ownership will not be counted for tax purposes. You will pay estate taxes only on the value as of the day you established the trust.
- Acronym: QPRT
A QPRT is an irrevocable trust, which means it generally cannot be changed or revoked once it is established. In this manner, it differs from a revocable trust.
How a QPRT Works
Let's say you want your son to inherit your house, but you're not ready to move out just yet. In order to reduce the impact that holding on to the house will have on your taxable estate, you can set up a qualified personal residence trust for 10 years.
Suppose the house is worth $400,000 at the time you set up the trust. Ten years from now, it may be worth $550,000. That $150,000 increase in value will happen tax-free, because the house is worth $400,000 in your trust. After 10 years, the house will pass to your son, and you will only be responsible for gift tax on the original $400,000 value.
There are many variations on how this might work in practice. If the original owner dies before the trust expires, for example, the tax benefits are voided. The original owner, their spouse, or their dependents must live in the home (or at least have it available for them to live in) during the entire period of the trust.
How to Set Up a QPRT
There are several steps involved in establishing a qualified personal residence trust.
Write the Irrevocable Trust Agreement
The first step in establishing a QPRT is writing the 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.
Fund the Trust With Your Residence
You'll then need 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.
Obtain an Appraisal of Your Residence for Gift Tax Purposes
As part of the transfer, you'll also need to obtain an appraisal of the residence as of the date you transfer it into the name of the QPRT from a licensed real estate appraiser. This is necessary to establish the fair market value of the property for gift tax purposes.
Report 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 Tax Day (usually April 15) of the year after you transfer the residence into the QPRT.
For tax year 2020, the IRS extended the tax-filing deadline for personal tax returns to May 17, 2021, which also extended the deadline for Form 709. In Texas, parts of Oklahoma, and Louisiana, the deadline was extended to June 15, 2021, because these areas were declared winter-storm disaster areas.
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.
You cannot generally add anything else to the qualified personal residence trust.
After You Set Up Your QRPT
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.
Transfer Ownership 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.
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.
- A QPRT is a trust designed to hold your primary or secondary residence and remove its value from your taxable estate.
- You can transfer your residence into the trust today but retain ownership for the period you designate.
- When the trust expires, ownership transfers to your beneficiary, but your gift tax impact is based on the original value when you established the trust.