A Qualified Personal Residence Trust, or QPRT for short, is a type of irrevocable trust that's designed to hold and own your primary or secondary residence and remove its value from your taxable estate. A QPRT works as follows:
1. Step One - Write the trust
The first step in establishing a QPRT is writing the actual trust agreement. You'll need to decide who will serve as the initial and successor trustees, how long you want to retain the right to live in the residence (this is called the "retained income period") before it passes to your ultimate beneficiaries, and then who will be the ultimate beneficiaries of the trust when the retained income period ends.2. Step Two - Fund the trust
The next step is to transfer ownership of your residence into the name of the QPRT. This is done by recording a new deed from your name into the name of the trust in the land records where the property is located.3. Step Three - Obtain an appraisal for gift tax purposes
The next step is to obtain an appraisal of the residence as of the date you transfer it into the name of the QPRT. This is necessary to establish the fair market value of the property for gift tax purposes.4. Step Four - Report Your Gift to the IRS
The next step is to file a Form 709, or gift tax return, with the IRS (note that the return will be due on April 15 of the year after you transfer the residence into the trust). This is necessary because the transfer of the residence into the QPRT is deemed to be a gift to the ultimate beneficiaries of the trust for gift tax purposes. If you live in a state that also has a state gift tax, then you'll also need to file a state gift tax return.5. Step Five - Go about your business as usual
During the retained income period of the QPRT, you'll go about your business as usual. This means that you'll be able to continue to live in the residence rent free and take all appropriate income tax deductions. And you'll also be required to maintain and repair the property for the benefit of the ultimate beneficiaries of the QPRT.6. Step Six - Transfer ownership of the residence to your ultimate beneficiaries
When the retained income period ends, the trustee of the QPRT must transfer ownership of the residence from the name of the trust into the names of your ultimate trust beneficiaries. This is done by by recording a new deed from the name of the trust into the names of the trust beneficiaries in the land records where the property is located.7. Step Seven - Pay rent
Once the retained income period ends, you'll need to pay fair market rent if you want to continue to live in the residence full time or if you want to use it periodically such as for vacations. This will help to further reduce the value of your taxable estate and pass more of your assets on to your ultimate beneficiaries without using any more of your gift tax exclusion since the rent payments won't be considered gifts to your beneficiaries.
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