Qualified Personal Residence Trust (QPRT)

In this post, I discuss the Qualified Personal Residence Trust (QPRT) — an irrevocable trust that transfers a personal residence to heirs at a reduced gift-tax value while the grantor retains the right to live in the home for a predetermined term.

A qualified personal residence trust, or QPRT, is an irrevocable trust in which the settlor—or grantor—of the trust transfers his or her own personal residence into the trust but retains the right to live in it for a predetermined period of time. With careful planning, the QPRT can serve as a valuable tool to lower or even eliminate estate and gift taxes.

Property that May Be Placed Into a Qualified Personal Residence Trust

Each person may have up to two personal residences, and consequently, up to two qualified personal residence trusts.

A vacation home may qualify as a personal residence for the purposes of creating a qualified personal residence trust, but the home must be used for the greater of 14 days or 10% of the number of days that it was rented out each year. This prevents a settlor from taking advantage of QPRTs for a pure investment or rental property.

Nature of the Trust

A qualified personal residence trust is a form of grantor retained annuity trust, or GRAT, meaning that the grantor must survive the term of the trust in order for the residence to be excluded from the grantor’s estate at death.

As with GRATs, however, QPRTs allow the settlor to take advantage of reduced valuation for gift tax purposes. This can consequently result in significant estate tax savings, so long as the settlor survives the trust.

In determining the value of the taxable gift, the settlor may subtract the value of the retained interest—that is the value of the settlor’s ability to remain living in the property—from the value of the property. Also like a GRAT, but unlike a GRIT, the settlor’s spouse may be the beneficiary of the remainder. This is important for gift tax purposes because gifts to spouses are not taxable. Also like a GRAT, if there is any income from the property, all of it must be paid to the settlor during the term of the trust. No income or principal can be distributed out of the qualified personal residence trust to anyone other than the settlor of the trust.

Retained Powers

The settlor of the trust retains the power to make the trustee sell the property in the trust. The proceeds may then be reinvested into a new residence, thus allowing the trust to continue as a qualified personal residence trust, or reinvested elsewhere, transforming the QPRT into a GRAT. Such a transformation, however, does not change the terms of the trust.

The settlor of the trust retains great power over the trust property. The settlor may even serve as the trustee of the QPRT, but this must be done carefully to avoid adverse estate or gift tax consequences.

How does a QPRT reduce gift and estate taxes?

A QPRT reduces transfer taxes by letting the grantor subtract the actuarial value of the retained right to live in the home from the home’s fair market value, so only the discounted remainder is a taxable gift — and all post-transfer appreciation escapes the grantor’s estate entirely. The statutory hook is Internal Revenue Code § 2702, which ordinarily values a retained interest in a family trust transfer at zero (forcing the grantor to treat the entire property value as a gift), but carves out an express exception for personal residence trusts:

"This subsection shall not apply to any transfer— … (ii) if such transfer involves the transfer of an interest in trust all the property in which consists of a residence to be used as a personal residence by persons holding term interests in such trust…"

— 26 U.S.C. § 2702(a)(3)(A)(ii) (the personal-residence exception to the zero-valuation rule of § 2702(a)(2)(A))

Because the QPRT falls outside § 2702’s zero-valuation rule, the retained term interest is valued under the ordinary actuarial tables of § 7520 — and that value can be substantial. The discount grows with (a) a longer trust term, (b) an older grantor, and (c) higher § 7520 interest rates, which is why QPRTs are most attractive in high-rate environments.

What happens if the grantor dies before the QPRT term ends?

The entire residence is pulled back into the grantor’s gross estate at its full date-of-death value, exactly as if the QPRT had never been created. This is the mortality risk inherent in every retained-interest transfer: because the grantor kept the right to occupy the home, death during the term triggers estate inclusion of property in which the decedent retained possession or enjoyment. The gift-tax discount is forfeited, although any gift tax exemption used on the original transfer is effectively restored. Practitioners manage this risk by choosing a term the grantor is comfortably likely to survive — a shorter term gives a smaller discount but a higher probability the strategy works.

What happens when the QPRT term ends?

Ownership shifts to the remainder beneficiaries (or continues in trust for them), and the grantor becomes a tenant. Three consequences matter:

• Rent is required. If the grantor stays in the home, he or she must pay fair-market rent to the new owners. Paying rent is not a defect — each rent check moves additional wealth out of the grantor’s taxable estate with no gift tax.
• No step-up in basis. The beneficiaries take the grantor’s carryover basis in the residence rather than the date-of-death fair market value they would have received through inheritance. For a highly appreciated home, the capital-gains cost of losing the basis step-up must be weighed against the estate-tax savings.
• Lock in the term carefully. The QPRT is irrevocable; the grantor cannot simply reclaim title if circumstances change.

Is a QPRT still worth it in 2026?

For most families, no — and that is worth saying plainly. The federal estate and gift tax exemption is $15 million per person ($30 million for a married couple) for 2026, made permanent (and inflation-indexed) by the One Big Beautiful Bill Act of 2025. A household whose total estate sits comfortably below those numbers gains little from a QPRT’s gift-tax discount and gives up the basis step-up for nothing. The candidates who should still look hard at QPRTs are (a) estates above or likely to grow above the exemption, (b) owners of rapidly appreciating homes in high-cost markets, and (c) families who want a vacation home locked in for the next generation. As with GRATs and other freeze techniques, the math should be run against current § 7520 rates before committing.

Disclaimer: This post is general legal and tax information about Qualified Personal Residence Trusts, not legal or tax advice. QPRT mortality risk, IRS §2702 valuation mechanics, and post-term rental requirements are complex; consult a qualified estate-planning attorney about your specific situation.

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