Qualified Personal Residence Trust (QPRT)

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A qualified personal residence trust, or QPRT, is an irrevocable trust in which the settlor—or grantor—of the trust transfers his or her own personal residence into the trust but retains the right to live in it for a predetermined period of time. With careful planning, the QPRT can serve as a valuable tool to lower or even eliminate estate and gift taxes.

Property that May Be Placed Into a Qualified Personal Residence Trust

Each person may have up to two personal residences, and consequently, up to two qualified personal residence trusts.

A vacation home may qualify as a personal residence for the purposes of creating a qualified personal residence trust, but the home must be used for the greater of 14 days or 10% of the number of days that it was rented out each year. This prevents a settlor from taking advantage of QPRTs for a pure investment or rental property.

Nature of the Trust

A qualified personal residence trust is a form of grantor retained annuity trust, or GRAT, meaning that the grantor must survive the term of the trust in order for the residence to be excluded from the grantor’s estate at death.

As with GRATs, however, QPRTs allow the settlor to take advantage of reduced valuation for gift tax purposes. This can consequently result in significant estate tax savings, so long as the settlor survives the trust.

In determining the value of the taxable gift, the settlor may subtract the value of the retained interest—that is the value of the settlor’s ability to remain living in the property—from the value of the property. Also like a GRAT, but unlike a GRIT, the settlor’s spouse may be the beneficiary of the remainder. This is important for gift tax purposes because gifts to spouses are not taxable. Also like a GRAT, if there is any income from the property, all of it must be paid to the settlor during the term of the trust. No income or principal can be distributed out of the qualified personal residence trust to anyone other than the settlor of the trust.

Retained Powers

The settlor of the trust retains the power to make the trustee sell the property in the trust. The proceeds may then be reinvested into a new residence, thus allowing the trust to continue as a qualified personal residence trust, or reinvested elsewhere, transforming the QPRT into a GRAT. Such a transformation, however, does not change the terms of the trust.

The settlor of the trust retains great power over the trust property. The settlor may even serve as the trustee of the QPRT, but this must be done carefully to avoid adverse estate or gift tax consequences.

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See Also:

The Federal Estate Tax

Irrevocable Living Trusts