How a QPRT Works
The grantor transfers a primary or secondary residence into the trust and reserves the right to live there rent-free for a chosen term, often 10 to 15 years. The taxable gift is the home's value minus the value of the retained use. At the end of the term, the home passes to the named beneficiaries (typically children) free of additional gift or estate tax.
Benefits
All future appreciation of the home occurs outside the grantor's estate. The technique works especially well when a high lifetime exemption is in effect or when the grantor expects the home to appreciate substantially.
Risks to Understand
If the grantor dies before the term ends, the home is pulled back into the estate as if no QPRT existed. After the term, the grantor must pay fair market rent to continue living in the home, since the children now own it. QPRTs are best suited for healthy grantors with longer life expectancy.
Arizona Income Allocation
Once the residence passes out of the QPRT, lease payments and other receipts are characterized under A.R.S. 14-7401.