When Should You Consider a QPRT?

When Should You Consider a QPRT?- When parents transferred a house into a QPRT in 2016 and kept living in it, the IRS didn’t tax the gift at the home’s market value. Instead, it was taxed at a discounted amount. The parents had the right to stay in the house for a fixed period, and the children received the remainder. This strategy is one to consider, says an article from 24/7 Wall Street, “They Gave the Beach House to the Kids in 2016 and Kept the Keys. The IRS Valued the Gift at a Fraction of What the House Was Worth”

How does it work? First, you need an experienced estate planning attorney. Don’t do it on your own. The homeowner deeds the residence into an irrevocable trust, written so they may live there rent-free for a stated term, usually ten to fifteen years. At the end of the term, the house passes to the children. Because the children must wait to receive ownership of the home, what they receive is less than the home’s fair market value. The gap depends on calculations using the Section 7520 rate, published monthly by the IRS, which applies to both the grantors' ages and the term length.

A longer term and higher 7520 rate can both increase the discount. This is why the taxable gift is a fraction of the appraised value rather than the full price tag. The rule is in IRC section 2702, and the valuation rate is set by section 7520.

The strategy works only if the grantor outlives the terms. If a parent passes during the retained year, the full date-of-death value of the house goes back into the taxable estate, and the discounted number on the original gift tax return is tossed. Because the person needs to be likely to live longer than the term, and for this reason, it is not a 100% sure thing. However, when it works, it’s good.

When Should You Consider a QPRT?

A possible pitfall: most people fail to plan for what happens when the term ends. The parents no longer own the house and no longer have the right to live there without paying rent. This isn't a difficult problem to fix, but it does need to be addressed. They must sign a written lease with the children and pay a documented fair market rate. The rent is taxable income to the children and a cash obligation for the parents.

Property passing through an estate at death generally gets a stepped-up basis to fair market value. However, a home transferred during life through a QPRT doesn’t. The children inherit the parent’s original cost basis and then owe capital gains tax on the full appreciated value when they sell.

Why is this worth doing? The QPRT trades a capital gains benefit for an estate tax benefit. Most families are well below the current $15 million per person federal estate tax exemption and won’t owe federal estate tax. However, for families who live in a state with its own estate tax, triggered in far lower thresholds, this could be a valuable approach.

A few details: the QPRT can only hold a personal residence, not a rental property or a business. A gift tax return will be due in the year of the transfer, and the discounted gift does impact part of the $15 million lifetime exemption. The trust is also irrevocable, so parents can’t change their minds.

Another thing to consider once the children legally own the house, it may be vulnerable to divorces, creditors and any disagreements between the children.

Have a detailed conversation with an experienced estate planning attorney to determine whether this is a good move to save a significant amount in taxes and whether the children are good candidates for this type of arrangement.

Schedule your phone consultation: THE LAW OFFICES OF CLAUDE S. SMITH, III

When Should You Consider a QPRT?

Reference: 24/7 Wall Street (Sep. 16, 2026) “They Gave the Beach House to the Kids in 2016 and Kept the Keys. The IRS Valued the Gift at a Fraction of What the House Was Worth”