QPRT is an acronym that stands for Qualified Personal Residence Trust. A QPRT is an irrevocable trust used as an estate planning technique to make a gift of a residence to family members at a reduced gift tax cost. The grantor of a QPRT (the person who creates the QPRT) may transfer a principal residence, another residence (i.e., a vacation home) or a fractional interest in either residence to a QPRT to remove the residence out of the grantor’s estate for estate tax purposes at a reduced gift tax cost.  This is how it works. When the grantor transfers the residence to the QPRT, the grantor retains the right to live in the residence for a term of years (without the obligation to pay rent). Upon the expiration of the grantor’s retained term, the ownership of the residence passes to the designated remainder beneficiary or beneficiaries.

The gift tax benefit provided by the use of a QPRT is attributable to the delayed transfer of the residence to the remainder beneficiary or beneficiaries. The value of the grantor’s retained term in the QPRT equals  the grantor’s right to own the residence during the retained term. The value of the beneficiary’s or beneficiaries’ remainder interest equals the fair market value of the residence less the value of the grantor’s retained interest. As such, the gift of the residence to the remainder beneficiary or beneficiaries is based on the value of the remainder interest in the QPRT, not the full value of the residence. Therefore, the greater the grantor’s retained interest in the QPRT, the lower the value of the remainder interest and the lower the value of the taxable gift to the beneficiary or beneficiaries. If, however, the grantor dies during the grantor’s retained term in the QPRT, the full value of the residence is included in the grantor’s estate for estate tax purposes. If the grantor survives the retained term and wishes to continue residing in the residence, the grantor must pay fair market value rent to the remainder beneficiaries since the grantor is no longer the owner of the residence.

Here is an example that highlights the gift tax benefit provided by a QPRT. Assume Bob owns a house worth $1 million. He decides that he would like to transfer it to his two adult daughters, Patty and Megan.  If Bob makes a an outright gift of the house to his daughters, he will owe a 35% gift tax on the full $1 million value, or $350,000 (assuming he had no exemption or exclusion to shelter the gifts). But, Bob decides to use a QPRT to transfer the house to Patty and Megan. Bob retains a 10 year term in the QPRT that allows him to continue to reside in the house rent-free during that time. Upon the expiration of Bob’s retained 10 year term, title to the residence is transferred to Patty and Megan. Let’s assume for purposes of this example that Bob’s retained term has a value of $600,000, and the remainder interest passing to Patty and Megan upon the expiration of the 10 year term has a value of $400,000. Also, assume that the value of the house has appreciated to $1.5 million at the end of Bob’s retained term. Bob’s gift of the entire $1.5 million house to Patty and Megan is valued at $400,000 for gift tax purposes. As such, Bob will owe a 35% gift tax on the $400,000 value of the remainder interest, which translates to a $140,000 gift tax. So, Bob will pay $350,000 in gift tax if he makes an outright gift of the house to his daughters or he will pay $140,000 in gift tax if he transfers the house to his daughters through a QPRT, thereby saving $210,000 in gift tax.

The use of a QPRT is a useful estate planning technique to transfer a principal residence or a vacation residence to loved ones at a reduced gift tax cost.

If you would like to discuss this or other trusts and estates issues, please contact the attorneys at Drucker Law Offices, 468 North Camden Drive, 2nd Floor, Beverly Hills, CA 90210, 310.285.5375 Tel, 310.444.9754 Fax, www.druckerlaw.com