Is a Qualified Personal Residence Trust (QPRT) Right for You?


What Is a Qualified Personal Residence Trust?

A Qualified Personal Residence Trust (“QPRT”) is an irrevocable trust established by someone who transfers their personal residence, or an interest in that residence, to the trust while retaining the right to continue to occupy the residence, rent-free, for the term of the trust. If the individual is still living at the end of the trust term, the personal residence is distributed to or for the benefit of the remainder beneficiaries of the trust. Under the right circumstances, a QPRT can be utilized to reduce or eliminate estate and gift taxes imposed on the transfer of a personal residence.

Valuation of Transferred Residence

When an individual transfers an interest in a primary residence to a QPRT, the value of the residence transferred, for estate and gift tax purposes, is reduced by the value of the transferor’s retained interest. This means that the transferor can ultimately remove the full value of the residence from their estate at a transfer tax cost that is less than the full value.

Impact of Interest Rates

The applicable federal rate has a direct impact on the tax benefit of a QPRT. This is because the value of the transferor’s retained interest in the residence is calculated according to the federal midterm rate in effect for the month in which the residence is transferred to the QPRT. Therefore, a low 7520 rate results in a lower value of the transferor’s retained interest, which corresponds to a larger gift made to the QPRT. A high 7520 rate results in a higher value of the transferor’s retained interest, and therefore a smaller taxable gift. Accordingly, QPRTs are usually more effective when interest rates are high.

Surviving the Trust Term

A QPRT allows a transferor to transfer their residence to family members at a reduced transfer tax cost so long as the transferor survives the trust term. If the transferor survives, the QPRT’s assets are distributed to the remainder beneficiaries at the expiration of the trust term and are no longer in the transferor’s estate. If the transferor wants to continue living in the residence after the trust term expires, they must pay fair market rent to the remainder beneficiaries. If the transferor does not survive the trust term, the trust terminates upon the transferor’s death and while the remaining assets are still distributed to the remainder beneficiaries, the value of the residence is includible in the transferor’s estate.

A QPRT can be an effective estate planning tool, particularly when interest rates are high. Anyone considering a QPRT should speak with their advisors and attorneys to determine if this type of structure make sense for them.

For more information on Estate Planning, contact BakerAvenue to discuss how we can help determine if a QRPT is right for you.

**DISCLAIMER: Baker Avenue Asset Management, LP is a not a law firm or in the business of providing legal advice. This information is being provided as a courtesy for financial planning purposes. We do not provide legal advice. Please contact your attorney before acting on any information provided herein.