Qualified personal residence trust (QPRT) refers to a type of trust used to minimize estate and gift taxes by moving personal residences into a trust. In a QPRT, the grantor irrevocably transfers a residence to the trust for a set amount of time while still living in the residence, and after the time ends, the property goes to the beneficiaries. If all of the QPRT requirements are met, the value of the property for tax purposes will be calculated based on the time the property was transferred to the trust, not when transferred to the beneficiaries, and the value of the property will be reduced by the grantor’s right to live at the property for the length of the trust.
The tax minimization comes from property that will increase in value over time, before the grantor intends to transfer the property. Instead of estate taxes being on the property value long in the future after property value increases, QPRTs freeze the value once transferred to the trust. Further, individuals can decrease the value of the property for tax calculations by lengthening the term of the trust because the grantor’s retained interest in the property reduces its taxable value.
However, there are some important requirements for a QPRT to be recognized by the IRS. First, the beneficial tax treatment only occurs if the grantor survives the trust, and therefore, the trust cannot be a life estate nor can the grantor die before the trust ends. Second, the grantor can only continue living at the residence after the trust ends by gaining a fair-market value lease from the beneficiaries, as they now own the property. Thirdly, a person can only transfer two personal residences to a QPRT. Any commercial property or non-real property (e.g. fixtures and appliances) will not count. Lastly, there are some tricky generation-skipping tax (GST) rules that must be followed, such as the predeceased parent rule, which must be followed in order to maximize GST exemptions.
[Last updated in May of 2022 by the Wex Definitions Team]