What Is a Qualified Personal Residence Trust (QPRT)?
A Qualified Personal Residence Trust (QPRT) is a specific type of irrevocable trust that allows its creator to remove a personal home from his or her estate for the purpose of reducing the amount of gift tax that is incurred when transferring assets to a beneficiary.
Qualified Personal Residence Trusts allow for the owner of the residence to remain living on the property for a period of time with "retained interest" in the house; once that period is over, the interest remaining is transferred to the beneficiaries as "remainder interest."
Depending on the length of the trust, the value of the property during the retained interest period is calculated based on Applicable Federal Rates that the Internal Revenue Service (IRS) provides. Because the owner retains a fraction of the value, the gift value of the property is lower than its fair market value, thus lowering its incurred gift tax. This tax can also be lowered with a unified credit.
How a Qualified Personal Residence Trust (QPRT) Works
A qualified personal residence trust can be useful when the trust expires prior to the death of the grantor. If the grantor dies before the term, the property is included in the estate and is subject to tax. The risk lies in determining the length of the trust agreement, coupled with the likelihood that the grantor will pass away before the expiration date. Theoretically, longer-term trusts benefit from smaller remainder interest given to the beneficiaries, which in turn reduces the gift tax; however, this is only advantageous to younger trust holders who have a lower possibility of passing away prior to the trust end date.
- A QPRT allows you to remove your home from the estate to reduce gift taxes.
- Property value during the retained interest period is calculated based on IRS Applicable Federal Rates.
- Other types of trusts include a bare trust and a charitable remainder trust.
QPRT and Other Trust Forms
Many different types of trusts exist in addition to a qualified personal residence trust. Two additional ones are a bare trust and a charitable remainder trust. In a bare trust, the beneficiary has the absolute right to the trust’s assets (both financial and non-financial, such as real estate and collectibles), as well as the income generated from these assets (such as rental income from properties or bond interest).
In a charitable remainder trust, a donor may provide an income interest to a non-charitable beneficiary with the remainder of the trust going to a charitable organization. The CRAT and CRUT are two types of charitable remainder trusts.
In both instances, the donor receives an income tax deduction from the present value of the remainder interest.