A qualified personal residence trust (QPRT) is a specific type of irrevocable trust that allows its creator to remove a personal home from their estate for the purpose of reducing the amount of gift tax that is incurred when transferring assets to a beneficiary. Qualified personal residence trusts allow the owner of the residence to remain living on the property for a period of time with “retained interest” in the house; once that period is over, the interest remaining is transferred to the beneficiaries as “remainder interest.” So how do you determine what is the right trust term of the QPRT?
Understanding the Trust Term
Depending on the length of the trust, the value of the property during the retained interest period is calculated based on applicable federal rates (AFR) that the Internal Revenue Service (IRS) provides. Because the owner retains a fraction of the value, the gift value of the property is lower than its fair market value (FMV), thus lowering its incurred gift tax. This tax can also be lowered with a unified credit.