The Home Freeze: Qualified Personal Residence Trusts (QPRT)
The Home Freeze: Qualified Personal Residence Trusts (QPRT)
Your home is appreciating faster than you can gift it. How to transfer your primary residence or vacation home to your children at a massive discount, freeze its value for estate tax purposes, and still live in it rent-free.
Executive Summary
- The Appreciation Problem: You own a $5M home in the Hamptons. In 10 years, it will be worth $10M. If you die then, your estate owes 40% tax on $10M ($4M tax). You need to move it out of your estate *now*.
- The Solution (QPRT): You transfer the house into a **Qualified Personal Residence Trust (QPRT)** for a fixed term (e.g., 10 years).
👉 The Discount: Because you keep the right to live there for 10 years, the value of the gift to your kids is *discounted*. The IRS calculates the gift value as only the “Remainder Interest.” A $5M house might be valued at just $2M for gift tax purposes. - The Gamble (Mortality Risk): You must outlive the term (10 years). If you die in Year 9, the house comes back into your estate at its *full current value*, and the strategy fails (you are back to square one).
The “Rent Back” Requirement
The End of the Term: After 10 years, the trust ends, and the house legally belongs to your children.
👉 Can I still live there? Yes, BUT you must pay **Fair Market Rent** to your children.
👉 Why this is Good: Paying rent is actually a *tax-free wealth transfer*. You are moving more cash from your estate to your kids without using any gift exemption. It reduces your taxable estate further.
Mechanic: The Value Shrinkage
Simulation: Transferring a $5M Vacation Home
| Feature | Life Estate Deed | QPRT (Qualified Personal Residence Trust) |
|---|---|---|
| Gift Value | Higher (Less Discount) | Lowest (Max Discount via AFR) |
| Asset Protection | Weak | Strong (Irrevocable Trust) |
| Mortality Risk | Step-Up Basis Lost | Reverts to Estate (No worse off) |
“A QPRT is a bet against your own life expectancy. If you win (live longer than the term), your heirs get a multi-million dollar asset for pennies on the dollar. If you lose, you are back where you started. It is a ‘Heads I Win, Tails I Don’t Lose’ trade.”