CandleFocus

Qualified Personal Residence Trust (QPRT)

A Qualified Personal Residence Trust (QPRT) is an effective estate planning tool used to remove a residence or vacation home from the taxable estate of an individual. This type of trust is used to minimize or minimize taxes that could be incurred while transferring ownership of a home or other residential property between generations.

To start a QPRT, a homeowner transfers the title of the residence to a trust. The trust will be responsible for ownership and maintenance of the home, with the homeowner retaining a right to use the home for a certain period of time, known as the retained interest period. At the end of the retained interest period, ownership of the home is transferred to other beneficiaries designated in the trust. The homeowner can also designate a third-party trustee to serve out the trust's obligations.

At the end of the retained interest period, the value of the residence or other real property will be determined using the Internal Revenue Service (IRS) 712 Applicable Federal Rate (AFR) tables. The AFR tables are also used to calculate how much the original homeowner will incur in gift tax as a result of transferring the home to the trust. For example, if a homeowner transfers their residence to the QPRT for a 10-year retained interest period and the current rate is 3%, the homeowner will pay 3% in gift tax for the transfer.

In addition to a QPRT, there are other types of trusts used in estate planning, such as a bare trust and a charitable remainder trust. A bare trust is a trust set up specifically for the benefit of one beneficiary and allows the assets to be transferred to the beneficiary at the end of the trust period. Like a QPRT, a charitable remainder trust is also used to minimize gift taxes by transferring assets to a trust that provides beneficiaries income for a specified period of time. After the trustee period’s expiration, remaining assets are given to a charity.

With the help of a qualified estate planning attorney, a homeowner can use a QPRT or other type of trust to reduce taxes and to ensure that their real estate can be passed on to heirs without paying a large estate tax bill.

Glossary Index