A qualified personal residence trust is an irrevocable trust that lets you move your home out of your taxable estate at a discounted gift tax value while you keep living in it for a set number of years. It works best for people whose estates exceed or approach the federal estate and gift tax exemption, which sits at $15 million per person for 2026, and who own a high-value home they expect to keep appreciating.1Internal Revenue Service. What’s New – Estate and Gift Tax The discount is real, but so is the catch: you have to outlive the term you pick.
How the Trust Works
You create the trust, transfer the deed to your home into it, and keep the right to live there for a fixed number of years, often 10 or 15. During that retained term, you still pay property taxes, insurance, and maintenance. Day-to-day, nothing changes.
When the term ends, the home passes to whoever you named as beneficiaries, usually your children. You no longer own it. If you want to keep living there, you pay them fair market rent. Those rent payments are not gifts. Each check quietly moves more money out of your taxable estate and into your heirs’ hands.
The whole strategy depends on you surviving the retained term. If you die before it expires, the home is pulled back into your taxable estate as if the trust never existed.2Office of the Law Revision Counsel. 26 USC 2036 – Transfers With Retained Life Estate The lifetime gift tax exemption you used for the transfer is restored, so it isn’t lost forever, but the estate tax savings evaporate along with the legal fees, appraisal costs, and administration expenses you paid to set the trust up.
Where the Gift Tax Discount Comes From
When you fund a QPRT, you’re gifting the remainder interest, meaning the right to own the property once your term ends. That remainder is worth less than the home’s current market value because the beneficiaries can’t use or sell the property for years. The IRS calculates how much less using two figures: the Section 7520 interest rate published monthly, and your age at the time of the transfer.3Office of the Law Revision Counsel. 26 USC 7520 – Valuation Tables
The Section 7520 rate is set at 120% of the federal midterm rate, rounded to the nearest 0.2%. For the first several months of 2026, it has ranged from 4.6% to 4.8%.4Internal Revenue Service. Section 7520 Interest Rates A higher 7520 rate makes a QPRT more attractive because it raises the calculated value of your retained right to occupy the home, which shrinks the taxable remainder interest. In a low-rate environment, the discount narrows.
Age cuts the other way. An older grantor’s retained interest is worth less actuarially, because they have fewer expected years of occupancy, so the taxable gift is larger. A younger grantor gets a bigger discount at the same term length. Most planners model the numbers at several term lengths and rate scenarios before settling on a structure.
The discounted gift is reported on IRS Form 709 and can be offset by your lifetime gift and estate tax exemption.5Internal Revenue Service. About Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return If the discounted value fits under your remaining exemption, you owe no gift tax. You’ve used part of your lifetime exemption at a fraction of the home’s actual worth.
What You Save on Estate Tax
Once you survive the term, the home’s full value, including every dollar of appreciation after the transfer, is out of your estate. A $2 million home that grows to $3 million over a 12-year term leaves none of that $3 million subject to estate tax at your death. You’ve frozen the transfer tax value at the discounted gift amount from the funding date.
Federal law treats a transfer as still belonging to the grantor’s estate if the grantor kept the right to live in the property until death.2Office of the Law Revision Counsel. 26 USC 2036 – Transfers With Retained Life Estate A QPRT sidesteps that rule because the retained term is designed to end while you’re still alive. Afterward, if you stay by paying fair market rent, you’re a tenant, not an owner, and nothing triggers estate inclusion. Rent payments after the term aren’t gifts either. They’re lease payments that keep draining your taxable estate with each check.
What Can Go Into the Trust
A QPRT can hold your primary home, a second home, or a vacation property. Each trust holds only one residence, but you can set up two separate QPRTs for two different properties. It can also hold a fractional interest in a qualifying residence. The trust can hold insurance policies on the home and any insurance proceeds if the property is damaged or destroyed.6eCFR. 26 CFR 25.2702-5 – Personal Residence Trusts The surrounding land is generally included as long as it’s reasonable in relation to the home’s size and residential use.
Investment or rental properties that don’t qualify as a personal residence can’t go into a QPRT. Furnishings and other personal property stay outside the trust.
Selling the Home Before the Term Ends
Life doesn’t always cooperate with a 10- or 15-year plan. If the home has to be sold mid-term, the trust doesn’t automatically collapse, but the rules are strict. The trust can hold the sale proceeds for up to two years while you look for a replacement. If you buy a new home of equal or greater value within that window, the replacement steps into the QPRT and the trust continues.6eCFR. 26 CFR 25.2702-5 – Personal Residence Trusts
If the replacement costs less than the sale proceeds, the leftover cash isn’t an eligible QPRT asset. Within 30 days, that excess must be either distributed back to you or converted into a grantor retained annuity trust arrangement for the remaining term. If you don’t reinvest in a new home at all, the entire QPRT converts to a GRAT or distributes back to you. The GRAT conversion is usually the choice, because taking the money back defeats the estate planning purpose, but GRAT rules add their own valuation requirements and cost. Avoiding a mid-term sale, or moving quickly to a replacement property, saves a lot of complication.
The Risks Worth Weighing
Dying Before the Term Ends
The biggest risk is not surviving the retained term. If that happens, the home’s full date-of-death value comes back into your taxable estate and the trust delivers nothing.2Office of the Law Revision Counsel. 26 USC 2036 – Transfers With Retained Life Estate The exemption you used is restored, but the setup costs are gone. A longer term produces a larger discount and a bigger gamble. A healthy 55-year-old choosing 15 years has reasonable odds. A 75-year-old choosing the same term is taking on real mortality risk. Advisors typically model health, family longevity, and actuarial tables before recommending a term length.
No Stepped-Up Basis for Your Heirs
This is the drawback most people miss. When property passes through your estate at death, heirs normally get a stepped-up cost basis equal to the home’s fair market value on the date of death, wiping out decades of built-in gain. A successful QPRT keeps the home out of your estate, so beneficiaries inherit your original cost basis instead, adjusted for improvements. If they hold the home, that may never matter. If they sell soon after the term ends, they could owe capital gains tax on all the appreciation going back to your original purchase. For a home that has tripled in value, that bill can be significant. For large estates, the estate tax savings usually still win, but the comparison deserves actual numbers before you commit.
Irrevocability
Once the trust is created and the deed transferred, you can’t undo it, swap in different beneficiaries, or pull the property back if your finances change. After the term, the beneficiaries own the home. In theory they could sell it, refuse to rent it to you, or use it in ways you’d never choose. Most families work this out. The legal reality is that you have no guaranteed right to stay.
Mortgaged Homes
If the home still has a mortgage, transferring it raises two problems. Most mortgages include a due-on-sale clause that lets the lender demand full repayment when ownership changes. Federal law generally protects transfers into a trust where the borrower stays a beneficiary and continues to occupy the property.7Office of the Law Revision Counsel. 12 USC 1701j-3 – Preemption of Due-on-Sale Prohibitions A QPRT fits that description during the retained term, but because it’s irrevocable and eventually shifts ownership entirely, some lenders scrutinize it. The cleaner approach is to pay off the mortgage before funding the trust, or at minimum get the lender’s written confirmation that they won’t accelerate. Ongoing payments also create a separate headache: each payment on debt secured by property you no longer own can be treated as an additional gift to the beneficiaries.
Setting One Up
The trust agreement has to comply with Treasury Department requirements for qualified personal residence trusts.6eCFR. 26 CFR 25.2702-5 – Personal Residence Trusts The IRS has published a sample document in Revenue Procedure 2003-42 that many estate planning attorneys work from.8Internal Revenue Service. Revenue Procedure 2003-42 – Qualified Personal Residence Trust The agreement names beneficiaries, sets the retained term, and spells out what happens if the home is sold, damaged, or if you die during the term.
Once signed, you transfer the property by executing and recording a new deed from yourself to the trust. You’ll need a professional appraisal establishing fair market value on the transfer date. That figure, combined with your age and the applicable Section 7520 rate, determines the taxable gift, which is reported on Form 709 for the year of the transfer.9Internal Revenue Service. Instructions for Form 709
You can serve as your own trustee during the retained term, though many grantors name a co-trustee or successor to handle the transition when the term ends. Given that this is an irrevocable transfer of what is often a family’s largest asset, the drafting, appraisal, deed, and Form 709 filing all need to be done correctly the first time. An estate planning attorney who regularly works with split-interest trusts can run the numbers and confirm whether the projected tax savings justify the cost and permanence.