Qualified Personal Residence Trust (QPRT)

A qualified personal residence trust (QPRT) is a trust that holds an individual's personal residence. The trust is created by the individual, who is known as the grantor. The grantor transfers ownership of the residence to the trust, and in return, the trust provides the grantor with an income stream for a specified period of time.

There are two types of QPRTs: term QPRTs and grantor retained interest QPRTs (GRIP QPRTs). With a term QPRT, the grantor retains the right to live in the residence for a specified period of time, typically 5, 10, or 15 years. After the specified period of time, the residence passes to the trust beneficiaries.

With a GRIP QPRT, the grantor retains a partial interest in the residence. This interest is known as the retained interest. The retained interest can be either a right to receive income from the trust or a right to use the residence.

QPRTs can be used to reduce taxes on capital gains and estate taxes. When the grantor transfers ownership of the residence to the trust, the grantor realizes a taxable capital gain on the difference between the fair market value of the residence and the adjusted basis of the residence. However, the grantor can spread out the recognition of this capital gain over the term of the trust. This can result in significant tax savings.

In addition, QPRTs can be used to reduce estate taxes. When the grantor dies, the residence passes to the trust beneficiaries. The trust beneficiaries are not subject to estate taxes on the value of the residence. This can save the grantor's estate a significant amount of money.

QPRTs are complex financial instruments, and there are a number of factors to consider before deciding whether to use one. It is important to consult with a qualified tax advisor before making any decisions about QPRTs.