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Trust Law/Level V · Tax and legacy/5.2 Annuity and unitrust structures/Lesson 4

Qualified personal residence trusts (QPRT)

How a US qualified personal residence trust values a gift of a home, what the regulations require of it, and what happens if the grantor dies during the term.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Under the 2026 basic exclusion of $15,000,000, a home kept until death passes with a §1014 stepped-up basis and no federal estate tax, which beats a QPRT, whose remainder keeps the grantor’s old basis (§1015); state estate thresholds may be lower.
  2. Selling a principal residence instead excludes up to $250,000 of gain, $500,000 for most joint filers, under IRC §121; the home must have been owned and used as a main home for at least 2 of the 5 years before sale.
  3. Where estate tax is a real cost, a QPRT under IRC §2702(a)(3)(A)(ii) cuts the taxable gift, and October 2026’s 5.6% §7520 rate makes the retained term worth more, shrinking it further; the grantor must outlive the term, or §2036 pulls the home back.
  4. After the term, paying fair-market rent to the new owners keeps the home out of the estate and moves more cash to family free of gift tax; living there rent-free risks §2036 inclusion, and the owners report the rent as income.

MaterialsA recent appraisal of the home you are reading about, for your own referenceThe text of IRC §2702 and Treas. Reg. §25.2702-5, free on law.cornell.eduThe mortgage statement and loan terms for the home, if it has a mortgageLesson 4.2.5, on protecting the family home, for the separate Medicaid rules

Wonder

  1. What happens if the grantor dies before the trust term ends?
  2. Why does a home that passes through a QPRT usually not get a stepped-up basis?
  3. What must the trust do if the home is sold during the term?

Explore

  1. Under IRC §2702, when someone gives a family member an interest in a trust but keeps an interest themselves, the kept interest is generally valued at zero for gift tax unless it is a ‘qualified’ annuity or unitrust interest (lesson 5.2.1). §2702(a)(3)(A)(ii) makes an exception for a trust holding only a residence used as a personal residence by the term holders. A qualified personal residence trust (QPRT) uses this exception: the grantor transfers a home to the trust, keeps the right to live in it for a fixed term of years, and the remainder passes to family, often children, when the term ends.
  2. Because of the exception, the grantor’s right to use the home is not valued at zero. The taxable gift is the home’s fair market value minus the value of the retained term interest, and of any retained reversion, worked out with the IRS §7520 interest rate and actuarial tables. A longer term or a higher §7520 rate makes the retained interest worth more and the gift smaller. The remainder is a future interest, so the annual exclusion does not apply; the gift is reported on Form 709 and uses part of the grantor’s basic exclusion (lesson 5.1.1).
  3. The grantor must outlive the term. If the grantor dies during it, the home’s value at death is generally included in the gross estate under IRC §2036, because the grantor kept its use (lesson 5.1.3). The plan then largely unwinds: the earlier gift is not counted again as an adjusted taxable gift, so the exclusion it used is broadly restored, but the costs of setting up the trust are lost. If the grantor survives the term, the home and any later growth in its value are outside the estate. A longer term means a smaller gift but a greater chance of dying before it ends.
  4. Basis is a trade-off. Property included in an estate generally takes a basis equal to its value at death (IRC §1014). A home that leaves the estate through a QPRT is a gift, so the family generally keeps the grantor’s basis instead (IRC §1015), and a later sale can bring capital gains tax on growth during the grantor’s ownership. Whether the estate tax saved outweighs this depends on values, rates and how long the family keeps the home. With the 2026 federal basic exclusion at $15,000,000 per person, many families have no federal estate tax to save.
  5. Treas. Reg. §25.2702-5 sets the rules. The trust may hold one residence of the term holder, either the principal residence or one other, plus limited cash: enough for expenses or improvements due within 6 months, or to buy a residence within 3 months. The trustee checks at least quarterly and pays any excess cash to the term holder. Income must be paid to the term holder at least yearly, and principal may not go to anyone else during the term. The trust must forbid selling the home to the grantor, the grantor’s spouse or an entity they control. A person may hold term interests in no more than 2 such trusts.
  6. If the home is sold, the trust may hold the proceeds in a separate share for up to 2 years to buy a replacement; otherwise it stops being a QPRT, and within 30 days the assets must be paid to the term holder or converted into a qualified annuity. A grantor who stays in the home after the term usually pays fair market rent to the new owners; living there rent-free risks inclusion under §2036. A mortgage complicates matters: loan terms may limit transfer, and later principal payments by the grantor can be further gifts. A QPRT is a tax tool, not a Medicaid tool (lesson 4.2.5). This lesson does not suggest using one.

Key facts

  • IRC §2702(a)(3)(A)(ii) excepts a trust holding only a personal residence from §2702’s zero-value rule for retained interests.
  • The taxable gift is the home’s value minus the grantor’s retained term interest, valued with the §7520 rate and IRS tables.
  • If the grantor dies during the term, the home is generally included in the gross estate under IRC §2036.
  • A home passing through a QPRT generally keeps the grantor’s basis instead of receiving a stepped-up basis at death.
  • Treas. Reg. §25.2702-5 limits a QPRT to one residence plus limited cash, with excess cash paid to the term holder at least quarterly.
  • A QPRT must forbid sale of the home to the grantor, the grantor’s spouse or an entity they control.

Exercise nine, six, three, one

9CollectList up to 9 facts about a home you are reading about (some lists are shorter), such as its value, purchase price, mortgage, who lives there, the grantor’s age, a proposed term and who would receive it.
6ClusterSort them into 6 categories: value and basis, debt, use and occupancy, people involved, timing, and facts you are unsure about.
3DistillReduce the 6 categories to 3 groups: facts that affect the size of the gift, facts that affect what happens at the end of the term or at death, and facts you would ask an adviser about.
1CrystallizeWrite 1 sentence explaining, in your own words, why a QPRT works as intended only if the grantor outlives the term.

Fact check

Dates, figures and claims checked against the published sources listed below.

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