The Power of QPRTs: Protecting Your Principal Residence

How the QPRT Structure Works

A QPRT is an irrevocable trust created by the grantor. The grantor transfers ownership of their principal residence (or a secondary residence) into the trust but, critically, reserves the right to occupy and use the home for a fixed period of time (the retained term).

The grantor’s retained interest—the right to live in the house and receive its use for the term—significantly discounts the current value of the taxable gift being made to the beneficiaries. The IRS calculates the present value of the future gift (the beneficiaries’ “remainder interest”) by subtracting the value of the grantor’s retained interest from the property’s current Fair Market Value (FMV). Because the beneficiaries do not gain full access to the property until the term ends, the present value of that remainder interest is greatly reduced, thereby consuming a much smaller portion of the grantor’s lifetime gift tax exemption. This leverage is what makes the QPRT highly attractive for transferring high-value, non-income-producing assets like a home.

The Tax-Free Transfer of Appreciation

The primary benefit of a successful QPRT is the freezing of the asset’s value for estate tax purposes. Once the QPRT is created and the initial gift is valued, the home’s value for estate tax purposes is fixed.

When the specified retained term finally expires, the home transfers fully to the beneficiaries. At this point, the current market value of the home is completely excluded from the grantor’s estate, regardless of how much it has appreciated since the trust was established. This means that if a $5 million home appreciates to $10 million during the QPRT term, the full $10 million—and all future growth—is transferred to the next generation free of estate tax, all for a gift tax cost based on a heavily discounted initial valuation.

Managing Life After the Term Expires

Once the retained term ends, the grantor no longer has the legal right to occupy the residence. At this stage, a common planning mechanism comes into play: the grantor can enter into a formal lease agreement to rent the home from the new owners (the beneficiaries).

Renting the home from the beneficiaries achieves two further planning goals. First, the rent payments represent tax-free cash flowing back into the grantor’s estate. Since the rent is paid for the use of the property, it is generally not considered a taxable gift to the grantor. Second, these rent payments can further reduce the size of the grantor’s taxable estate, as the funds paid out as rent are effectively reducing the assets subject to estate tax at death. Conversely, the rental income received by the beneficiaries can be used to pay property expenses, effectively shifting that burden off the grantor.

The Major Risk: Mortality

While the QPRT is a powerful tool, it carries one significant risk: the grantor must outlive the retained term for the plan to be successful.

If the grantor dies before the QPRT term ends, the full fair market value of the residence at the time of death is pulled back into the grantor’s taxable estate under Internal Revenue Code Section 2036. This risk negates all the intended estate tax benefits, although the grantor’s initial gift tax exemption used to create the QPRT is generally restored. For this reason, the retained term of a QPRT should be carefully chosen based on the grantor’s age and health, balancing the desire for a large valuation discount (which requires a longer term) against the risk of premature death.

Disclaimer: This article provides general information and should not be considered professional financial or tax advice. Please consult with a qualified CPA or financial advisor for guidance specific to your individual business needs.