Qualified Personal Residence Trust
Transfer Your Home at a Discount
A QPRT lets you give your home to your heirs at a fraction of its gift tax value. You keep living there for a set number of years, and if you outlive the term, the home is out of your estate.
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How it works
You create an irrevocable trust and transfer your home into it. You keep the right to live in the home for a fixed number of years, say 10 or 15. During that time, nothing changes day to day: you live in your home just as you always have.
When the term ends, the home passes to your beneficiaries, usually your children. The key benefit is that for gift tax purposes, the “gift” is not the full value of your home. It’s the value minus the worth of your right to live there during the term. That discount can be significant, often 40% to 70% of the home’s value, depending on your age, the term length, and current interest rates.
Why the discount works
The IRS calculates the gift using a formula based on three factors:
- Your age at the time you create the trust: older means a bigger discount (your retained interest is worth more)
- The term of the trust: longer term means a bigger discount (you’re keeping the home longer)
- The IRS interest rate (§7520 rate): higher rate means a bigger discount (unlike GRATs, QPRTs benefit from higher rates)
The gift is reported on a gift tax return (Form 709) in the year you fund the trust. With a large enough discount, the gift may be small enough to fit within your lifetime exemption, meaning no gift tax is actually owed.
The catch: you have to outlive the term
If you die during the QPRT term, the home goes back into your taxable estate. The transfer is treated as if it never happened. You don’t lose the home; it passes to your heirs through your estate, but you don’t get the transfer tax savings.
This is the QPRT’s main risk. The solution is to pick a term you’re confident you can outlive. A 65-year-old in good health choosing a 10-year term has favorable odds. A 20-year term at the same age is riskier. Your estate planning attorney and tax advisor can help you balance the discount against the mortality risk.
After the term: stay and pay rent
When the term ends, your right to live in the home expires. You have two options:
- Move out: your beneficiaries take over the property
- Stay and pay fair market rent: you sign a lease with your children (or the continuing trust) and pay rent every month at a genuine market rate
Many people choose the second option, and there’s a reason: the rent you pay further reduces your taxable estate. You’re moving money to the next generation every month, and it’s not a gift; it’s payment for a place to live. It’s an additional estate planning benefit on top of the original transfer.
The one thing you absolutely cannot do is stay in the home without paying rent. If the IRS finds that you’re living there rent-free after the term, they can pull the home back into your estate, which would defeat the entire purpose of the QPRT.
What if you need to sell?
Life happens. If you need to sell the home during the trust term, whether you’re downsizing, relocating, or the home needs major work, the trust has two years to buy a replacement personal residence. If you buy a new home within that window, the QPRT continues with the new property. If not, the trust converts into a different structure that pays you an annuity for the rest of the term.
Either way, it’s not a crisis, just a transition that needs to be handled correctly. Coordinate with your tax advisor before selling.
Best candidates for a QPRT
- You own a home that’s expected to appreciate: the more it grows, the more value you’re moving out of your estate
- You’re in good health and confident you’ll outlive the term
- You plan to stay in the home (or are comfortable paying rent after the term)
- Your estate is large enough that transfer tax planning is a priority
When it might not be the right fit
- You’re thinking about selling the home or downsizing in the near future
- You have health concerns that make outliving the term uncertain
- Your estate is below the estate tax exemption and you don’t need to reduce it
- You’re not comfortable with the idea of paying rent to your own children
One thing to know: carryover basis
When your beneficiaries receive the home at the end of the QPRT term, they take a carryover basis, your original cost basis in the home, not its current fair market value. This is different from assets inherited at death, which get a stepped-up basis. If the home has appreciated significantly, the beneficiaries could face a large capital gain when they sell.
This doesn’t change the analysis for most people; the estate tax savings typically far outweigh the capital gains cost, but it’s worth understanding.
Frequently Asked Questions
What is a QPRT?
A QPRT (qualified personal residence trust) is a trust you create to transfer your home to your heirs at a reduced gift tax cost. You put your home into the trust and keep the right to live there for a set number of years. When the term ends, the home passes to your beneficiaries. The gift tax is based on a discounted value, not the full fair market value, because you kept the right to live there during the term. If you outlive the term, the home is out of your estate for good.
What happens after the term ends - do I have to move out?
Not necessarily. You have two options: move out and let your beneficiaries have the home, or stay and pay them fair market rent under a formal lease. Many people choose to stay and pay rent, which actually provides another estate planning benefit: the rent payments move more money out of your estate without any gift tax. The key is that the rent must be at a genuine market rate, and you must actually pay it. Living there rent-free after the term would undo the tax benefits of the QPRT.
What if I need to sell the home during the trust term?
You can sell the home, but the trust has two years to buy a replacement personal residence. If you buy a new home within that window, the QPRT continues with the new property. If you don’t buy a replacement within two years, the trust converts to a different structure that pays you an annuity for the rest of the term. Either way, it’s manageable, just coordinate with your tax advisor before selling.
What’s the difference between a QPRT and a GRAT?
Both are irrevocable trusts that transfer assets to the next generation at a reduced gift tax cost, and both carry mortality risk. The main difference is what they hold: a QPRT holds your personal residence and you retain the right to live there, while a GRAT holds any type of asset and you retain a fixed annuity payment. They also respond differently to interest rates: QPRTs produce smaller gifts when rates are higher, while GRATs produce smaller gifts when rates are lower.
Related services
Inherited Assets & Stepped-Up Basis
QPRT beneficiaries take a carryover basis, not a step-up. Understanding the difference matters when they sell.
Individual Tax Return (1040)
During the QPRT term, the trust is a grantor trust; any income flows through to your personal return.
GRATs
A related estate freeze technique for non-residence assets, the counterpart to a QPRT.