A qualified Personal Residence Trust (QPRT) is an excellent tool for persons with large estates to transfer a principal residence or vacation home at the lowest possible gift tax value. The general rule is that if a person makes a gift of property in which he or she retains some benefit, the property is still valued (for gift tax purposes) at its full fair market value. In other words, there is no reduction of value for the donor's retained benefit.

Amo Residence

In 1990, to ensure that a principal residence or vacation residence could pass to heirs without forcing a sale of the residence to pay estate taxes, Congress passed the QPRT legislation. That legislation allows an exception to the general rule described above. As a result, for gift tax purposes, a reduction in the residence's fair market value is allowed for the donor's retained interest.

For example, assume a father, age 65, has a vacation residence valued at $1 million. He transfers the residence to a QPRT and retains the right to use the vacation residence (rent free) for 15 years. At the end of the 15 year term, the trust will terminate and the residence will be distributed to the grantor's children. Alternatively, the residence can remain in trust for the benefit of the children. Assuming a 3% discount rate for the month of the transfer to the QPRT (this rate is published monthly by the IRS), the present value of the future gift to the children is only $396, 710. This gift, however, can be offset by the grantor's $1 million lifetime gift tax exemption. If the residence grows in value at the rate of 5% per year, the value of the residence upon termination of the QPRT will be $2, 078, 928.