You've spent decades building equity in your home. Maybe it's a family ranch in East Texas or a lakefront vacation house in Arkansas where grandkids have learned to fish every summer. As property values climb, so does the potential tax bill your heirs will face when you're gone.
A Qualified Personal Residence Trust (QPRT) offers a way to transfer that high-value property to your children or other beneficiaries at a fraction of its current worth for gift and estate tax purposes, all while you continue living there for a set number of years. An East Texas Estate Planning Lawyer can show you how this strategy works, what it saves, and what could go wrong if life takes an unexpected turn.
How a Qualified Personal Residence Trust (QPRT) Works
A Qualified Personal Residence Trust (QPRT) is an irrevocable trust designed specifically for transferring a personal residence to heirs. You place one residence into the trust, retain the right to live there for a term you choose (often 10 to 20 years), and name your children or other beneficiaries as the remaindermen who will own the home outright when the term ends.
The property must generally continue to be used as your personal residence throughout the term. If the residence ceases to be used as your personal residence, the QPRT regulations require specific actions to preserve compliance, like sale and reinvestment in a replacement residence, or conversion to an annuity trust.
The Tax Advantage of QPRTs
When you transfer property into a QPRT, the IRS calculates the gift's value using Section 7520, an interest rate published monthly for valuing remainder interests. The longer the term and the higher the rate, the smaller the taxable gift. A $1 million home might generate a taxable gift of only $400,000 if you retain a 15-year term.
Any appreciation during the trust term passes to your beneficiaries without additional gift or estate tax consequences beyond that initial discounted gift, assuming you survive the term.
After the QPRT Term Ends
When the QPRT term expires, legal title transfers to your beneficiaries. If you want to keep living there, you'll need to pay them fair market rent through a written lease agreement. Below-market or no rent can be treated as additional gifts and undermine the intended transfer-tax benefits. The rent should reflect what an unrelated tenant would pay, and your children must report the rental income on their tax returns.
What Qualifies as a Personal Residence?
Under Treasury Regulation § 25.2702-5(c)(2), a QPRT may hold your principal residence or one other residence you use personally. It cannot hold rental property, investment real estate, or property you rarely visit. The residence may include appurtenant structures and adjacent land, but only to the extent the land is "not in excess of that which is reasonably appropriate for residential purposes."
For ranches or farms, this often means carving out only the home site and a reasonable buffer of surrounding land for the QPRT. You would then address the remaining agricultural acreage through other Estate Planning tools. The trust can't be used to transfer a commercial farming or ranching operation under the guise of a personal residence.
The Mortality Risk and Basis Trade-Off
If you die before the trust term ends, the full value of the property at your death gets included in your taxable estate, and the estate tax benefit is lost. However, your heirs generally receive a step-up in income tax basis to the fair market value at your death, which eliminates built-in capital gain.
If the QPRT "works" and you survive the term, your heirs take a carryover basis under IRC § 1015. If you purchased the home for $200,000 and it's worth $1.2 million when your children receive it, their basis is $200,000. If they sell for $1.3 million, they'll owe capital gains tax on a $1.1 million gain. This creates a planning tension, since you save estate tax but increase potential income tax burden.
Consult your tax advisor about whether principal residence exclusion planning could reduce capital gains tax if your heirs later use the home as their principal residence before selling. Choosing the right term length is critical. Go too long and you increase mortality risk; go too short and you reduce the gift tax discount. Most planners recommend terms based on reasonable survival probability given your age and health.
Mortgage, Insurance, and Trustee Requirements
If your home carries a mortgage, the net equity value drives the remainder interest calculation. If you continue making mortgage payments after the transfer, the principal portion may be treated as additional taxable gifts to the remainder beneficiaries, depending on how the debt is structured. Work with your Attorney and CPA to understand how your specific loan payments are treated.
The trustee must manage the trust in compliance with regulations that strictly limit what the trust can hold: the residence, improvements, and limited cash for expenses. Property insurance must be properly structured with the trust or trustee named as an insured party and adequate liability protection maintained.
Gift Tax Reporting and Transfer Restrictions
Funding a QPRT requires filing IRS Form 709 for the year of transfer. You'll need a qualified appraisal to establish fair market value (FMV) and support valuation calculations based on IRS actuarial tables, the chosen term, and the Section 7520 rate. The taxable gift counts against your lifetime exemption ($15,000,000 for 2026).
The trust instrument must prohibit sale or transfer of the residence to the grantor, grantor's spouse, or controlled entities during the term or while the term holder holds an interest. You generally shouldn't plan on buying the home back from your children after the term ends while you or your spouse still has any interest in the trust structure.
If your QPRT names grandchildren or other skip persons as remaindermen, you'll need to consider allocating a generation-skipping transfer (GST) tax exemption. This specialized planning requires coordination between your Attorney and tax advisor.
Texas and Arkansas Considerations
Texas is a community property state, affecting how married couples structure QPRTs. Most Attorneys recommend both spouses create mirror QPRTs for efficient transfer of the entire home. Arkansas follows common law property rules. Property conveyed to multiple persons is presumed held as tenants in common unless the deed expressly creates a joint tenancy.
State Estate Tax
Both states lack state estate taxes, so planning focuses on federal estate tax. Neither state imposes additional transfer-tax burdens beyond federal requirements.
Texas Homestead Exemptions
Trust-owned property in Texas may qualify for homestead exemption if the trust is a "qualifying trust" with proper documentation. Work with your East Texas Estate Planning Attorney to ensure the trust document includes necessary language and that the deed and trust are recorded properly with your county clerk's office.
Arkansas Homestead Credit
Arkansas provides a homestead property tax credit of up to $500, with an authorized increase to up to $600 beginning with 2026 property tax bills. Before funding a QPRT, check with your county assessor about how the transfer affects credit eligibility.
Medicaid Planning Conflicts With QPRTs
QPRTs are primarily transfer-tax tools that may conflict with Medicaid Planning. Transferring your residence into a QPRT is generally treated as a transfer for less than fair market value.
Medicaid generally applies a 60-month look-back to such transfers. The penalty period is calculated based on uncompensated value, and state rules affect how penalties are calculated. Some states may look to full fair market value while others apply actuarial methods to value retained interests.
If long-term care planning is a concern for you or your spouse, you need state-specific analysis of both federal gift tax benefits and Medicaid consequences. Discuss timing and structure with an Attorney who handles both Estate Planning and Medicaid Planning.
Is a QPRT Right for You?
A QPRT makes the most sense when you own a high-value residence, are confident you'll outlive the trust term, want that specific property to go to specific heirs, and your heirs plan to keep the property long-term rather than sell immediately. You must be comfortable with the irrevocability, the requirement to continue using the property as your residence during the term, and paying fair market rent if you outlive the term.
QPRTs are less suitable if your estate falls well below federal exemption thresholds, if you're in poor health, if you value flexibility, if Medicaid eligibility is a near-term concern, or if you own extensive acreage that can't reasonably be characterized as residential land.
The technical requirements require experienced legal guidance. Don't attempt to set up a QPRT without a skilled Attorney who regularly handles these structures. Contact Ross & Shoalmire, P.L.L.C. to discuss whether a QPRT fits your situation and how it would work alongside your other Estate Planning goals.
