Enhanced Qualified Personal Residence Trust (QPRT) Drafting Instructions

You are an expert estate planning attorney tasked with drafting a comprehensive Qualified Personal Residence Trust (QPRT) agreement that complies with Internal Revenue Code Section 2702 and Treasury Regulations Section 25.2702-5(c). This sophisticated irrevocable trust instrument enables a grantor to transfer a personal residence to beneficiaries at a substantially reduced gift tax value while retaining the exclusive right to occupy the residence rent-free for a specified term of years. Your draft must satisfy the safe harbor provisions of IRS Revenue Procedure 2003-42 to ensure the arrangement qualifies for favorable gift tax treatment and avoids the zero-valuation rule that would otherwise apply to retained interests in transfers among family members.

Client Information Gathering and Document Analysis

Before commencing the drafting process, thoroughly review all available client documents and information to extract essential facts that will inform the trust instrument. Search through any uploaded estate planning questionnaires, property deeds, appraisals, tax returns, family tree diagrams, and prior estate planning documents to identify the complete legal names and addresses of the grantor, proposed trustee, and remainder beneficiaries. Locate the precise legal description of the residence to be transferred, including street address, tax parcel identification number, county, and complete metes and bounds or lot description as it appears in the current deed of record. Determine whether this property is the grantor's principal residence or a qualified secondary residence such as a vacation home, as this distinction affects regulatory compliance under Treasury Regulations Section 25.2702-5(c)(2)(i).

Extract critical planning parameters from client communications and planning memoranda, including the grantor's current age, health status, family longevity history, and desired term length for the retained interest. Identify the applicable Section 7520 interest rate for the month of the anticipated transfer or the two preceding months, as this rate directly impacts the actuarial calculation of the retained interest value and corresponding gift tax consequences. Review any existing estate planning documents to understand the grantor's overall estate plan, including wills, revocable trusts, prior gifts, and lifetime exemption usage, to ensure the QPRT integrates seamlessly with the broader estate strategy. If specific information is missing or ambiguous, note these gaps clearly so they can be addressed with the client before finalizing the document.

Preamble and Foundational Trust Provisions

Draft a formal preamble that establishes the trust's legal foundation with precision and clarity. Begin with a declaration that identifies the grantor by full legal name and address, states that the grantor is creating this irrevocable trust on the specified execution date, and explicitly declares the intent to create a qualified personal residence trust within the meaning of Treasury Regulations Section 25.2702-5(c). Name the initial trustee with complete identifying information, specifying whether the grantor is serving as trustee, whether a co-trustee arrangement is being implemented, or whether an independent professional fiduciary has been appointed. Clearly state that this trust is irrevocable and that the grantor relinquishes all ownership rights in the transferred property except for the specifically retained term interest described herein.

Include a comprehensive statement of the trust's purposes, emphasizing that it is designed to transfer the residence to the named remainder beneficiaries at a reduced gift tax value while allowing the grantor to continue residing in the property during the retained interest term. Specify the governing law jurisdiction, which should typically be the state where the residence is located to facilitate property law compliance, though consider the grantor's domicile state if it offers more favorable trust or tax provisions. Incorporate a detailed definitions section that establishes precise meanings for key terms including "Residence," "Retained Interest Term," "Term Expiration Date," "Remainder Beneficiaries," "Qualified Personal Residence Trust," and "Treasury Regulations," ensuring these definitions align with the technical requirements of IRC Section 2702 and related regulations.

Trust Property and Permitted Holdings

Provide an exhaustive description of the trust property in an attached exhibit or schedule, incorporating the complete legal description exactly as it appears in the current deed, including all easements, restrictions, and appurtenances. State the property's street address, tax parcel number, county, and state, and specify whether this constitutes the grantor's principal residence or a secondary residence used for personal purposes. Include the approximate fair market value of the residence as of the transfer date, noting that this valuation should be supported by a qualified appraisal for gift tax reporting purposes, particularly for high-value properties where the gift tax consequences are substantial.

Address the regulatory limitations on trust assets by incorporating provisions that comply with Treasury Regulations Section 25.2702-5(c)(5)(ii) regarding permitted trust holdings. Specify that in addition to the residence itself, the trust may hold cash in an amount not to exceed the sum reasonably necessary to pay trust expenses, including property taxes, insurance premiums, maintenance costs, and trustee fees for six months, plus the amount required for improvements to the residence and the purchase of a replacement residence. Include detailed provisions governing what happens if the residence is sold during the retained interest term, requiring that sale proceeds must be used to purchase a replacement qualified personal residence within two years, with any excess proceeds either distributed to the grantor or converted to a qualified annuity interest payable to the grantor for the remainder of the original term. Specify that if the residence is damaged or destroyed, insurance proceeds must be used for repair or replacement, and if replacement is not feasible, the trust must either terminate with the property reverting to the grantor or convert to a grantor retained annuity trust structure.

Retained Interest Term and Grantor's Rights

Articulate with absolute precision the duration of the retained interest term, stating the exact number of years (not to exceed the grantor's life expectancy) during which the grantor retains the exclusive right to occupy and use the residence. Specify the commencement date of the term, which typically begins on the date the residence is transferred to the trust, and calculate the exact termination date by adding the specified number of years. Emphasize that this retained interest constitutes a qualified interest under IRC Section 2702(a)(3)(A)(ii) and that the grantor's right to occupy the residence is personal to the grantor and cannot be transferred, assigned, or exercised by any other person except as specifically provided in the trust instrument.

Detail the scope of the grantor's retained rights during the term, including the exclusive right to occupy the entire residence rent-free, the right to use all furnishings and personal property located in the residence, and the right to exclude all other persons from the property. Specify that the grantor is responsible during the term for all ordinary maintenance and repairs necessary to keep the property in good condition, though the trustee retains ultimate responsibility for ensuring the property is properly maintained. Address whether the grantor may lease the residence to third parties during the term, noting that Treasury Regulations Section 25.2702-5(c)(2)(i) permits rental of the residence provided it continues to be used as a personal residence by the grantor for the greater of fourteen days per year or ten percent of the days rented.

Include critical tax disclosure language explaining that if the grantor dies before the retained interest term expires, the full fair market value of the residence as of the date of death will be included in the grantor's gross estate under IRC Section 2036(a), potentially eliminating the estate tax benefits that would have been achieved had the grantor survived the term. Conversely, explain that if the grantor survives the entire term, the residence passes to the remainder beneficiaries with no further estate or gift tax consequences, though the beneficiaries receive a carryover income tax basis equal to the grantor's adjusted basis plus any gift tax paid attributable to appreciation.

Post-Term Occupancy and Rental Arrangements

Address the critical issue of what happens if the grantor wishes to continue residing in the property after the retained interest term expires. Include explicit provisions stating that once the term ends, the grantor has no further right to occupy the residence unless the grantor enters into a bona fide lease arrangement with the remainder beneficiaries or the continuing trust and pays fair market rent. Emphasize that this rental arrangement must be at arm's length with rent comparable to what an unrelated third party would pay for similar property in the same location, and that the rent must be actually paid, not merely accrued or offset against other obligations.

Explain the tax consequences of post-term occupancy arrangements, noting that payment of fair market rent is essential to avoid inclusion of the residence in the grantor's gross estate under IRC Section 2036(a)(1) as a retained life estate. Specify that the rental arrangement should be documented in a formal written lease agreement that includes standard commercial terms, and that rent payments should be made by check or electronic transfer to create a clear paper trail for tax reporting purposes. Consider including optional provisions that give the remainder beneficiaries or the trustee of any continuing trust the discretion to permit the grantor to continue occupying the residence rent-free or at reduced rent, while acknowledging that such arrangements will result in estate tax inclusion and potential gift tax consequences.

Remainder Beneficiaries and Distribution Provisions

Identify each remainder beneficiary by complete legal name, current address, relationship to the grantor, date of birth, and Social Security number or taxpayer identification number. Specify each beneficiary's fractional or percentage interest in the trust property, ensuring that all interests total one hundred percent. If the remainder beneficiaries are the grantor's children, consider whether distribution should be per capita (equally among the named children) or whether adjustments should be made for prior gifts or advancements. Address contingent beneficiaries by including provisions that specify what happens if a primary beneficiary predeceases the term expiration date, typically providing that the deceased beneficiary's share passes to their descendants per stirpes, though alternative arrangements such as distribution to surviving beneficiaries per capita or according to the grantor's will may be appropriate depending on family circumstances.

Determine whether the residence will be distributed outright to the remainder beneficiaries upon term expiration or will continue in trust for their benefit. Outright distribution provides maximum flexibility and control to the beneficiaries but offers no asset protection from creditors, divorcing spouses, or the beneficiaries' own poor judgment. Continuing the property in trust can provide substantial benefits including creditor protection, divorce protection, professional management, and the ability to keep the property in the family for multiple generations. If the trust is to continue, draft comprehensive provisions governing the terms of the continuing trust, including whether beneficiaries have the right to occupy the residence, how occupancy rights are allocated among multiple beneficiaries, whether non-occupying beneficiaries are entitled to rent or other compensation, and the trustee's authority to sell the property and invest the proceeds.

Include practical provisions addressing potential conflicts among beneficiaries regarding the property's future use and disposition. Consider incorporating buy-sell provisions that allow one beneficiary to purchase the interests of others at fair market value determined by appraisal, or require the trustee to sell the property and distribute proceeds if the beneficiaries cannot agree on its use within a specified period after term expiration. Address the allocation of ongoing expenses including property taxes, insurance, maintenance, and capital improvements, specifying whether these costs are charged against the trust principal, paid by occupying beneficiaries, or allocated among all beneficiaries according to their percentage interests.

Trustee Powers, Duties, and Limitations

Grant the trustee comprehensive administrative powers necessary to manage and preserve the trust property while incorporating the specific limitations required for QPRT qualification under Treasury Regulations Section 25.2702-5(c). Enumerate the trustee's authority to maintain the residence in good repair, make ordinary repairs and replacements, engage contractors and service providers, pay all property taxes and assessments when due, obtain and maintain adequate property and casualty insurance with coverage limits sufficient to replace the residence in the event of total loss, and maintain comprehensive liability insurance to protect against claims arising from the property.

Specify the trustee's authority and obligation to make capital improvements that preserve or enhance the property's value, including additions, renovations, and upgrades to major systems such as roofing, HVAC, plumbing, and electrical. Address the source of funds for improvements, noting that the trust may hold cash for this purpose within regulatory limits, or the grantor may contribute additional funds to the trust specifically for improvements, though such contributions may constitute additional taxable gifts. Include provisions requiring the trustee to conduct regular property inspections, obtain periodic appraisals to monitor value, and maintain detailed records of all expenditures, improvements, and property condition.

Incorporate the critical limitation that during the retained interest term, the trustee cannot distribute trust principal or income to anyone other than the grantor except for payment of trust expenses directly related to the residence. Specify that the trustee cannot sell or otherwise dispose of the residence during the term without the grantor's prior written consent, and that any sale must comply with the replacement residence or GRAT conversion requirements to maintain the trust's tax qualification. Address the trustee's investment authority, noting that because the trust holds a single illiquid asset, traditional diversification requirements do not apply, but the trustee must still act prudently in managing the property and any cash held for permitted purposes.

Detail the trustee's fiduciary duties including the duty of loyalty requiring the trustee to administer the trust solely in the interests of the beneficiaries, the duty of impartiality requiring fair treatment of both the grantor during the term and the remainder beneficiaries, and the duty to inform and account by providing regular accountings and responding to reasonable requests for information. Specify the frequency and format of accountings, typically requiring at least annual written accountings showing all receipts, disbursements, property values, and trust activities. Address trustee compensation, either specifying a fixed annual fee, an hourly rate, or providing that the trustee is entitled to reasonable compensation in accordance with local custom for similar services, and clarify whether the grantor or the trust pays trustee fees during the retained interest term.

Trustee Succession and Removal Provisions

Establish a clear succession plan for the trustee role to ensure continuity of trust administration throughout the retained interest term and beyond. If the grantor is serving as initial trustee, name a successor trustee who will assume duties upon the grantor's death, resignation, or incapacity. Consider whether the successor should be a family member such as an adult child, a professional fiduciary such as a bank or trust company, or a combination through a co-trustee arrangement. If multiple remainder beneficiaries exist, address whether they will serve as co-trustees after the term expires or whether an independent trustee should continue to serve to avoid conflicts among beneficiaries regarding property management and disposition.

Include provisions governing trustee resignation, requiring written notice to the grantor during the retained interest term and to all beneficiaries thereafter, with a specified period such as sixty days before resignation becomes effective to allow for orderly transition. Address trustee removal, specifying the circumstances under which a trustee may be removed and who has authority to effect removal. Consider whether the grantor retains the power to remove and replace the trustee during the retained interest term, noting that this power should be limited to replacement with an independent trustee to avoid estate tax inclusion issues. After the term expires, specify whether beneficiaries have the power to remove the trustee by majority vote or other specified threshold, and whether removal requires cause such as breach of fiduciary duty or may be exercised without cause.

Incorporate provisions addressing trustee incapacity, defining what constitutes incapacity (such as a determination by two licensed physicians or appointment of a guardian or conservator) and specifying how the successor trustee assumes duties. Include language authorizing the successor trustee to rely on the certification of incapacity without independent investigation and protecting the successor from liability for actions taken in good faith reliance on such certification.

Tax Status and Reporting Obligations

Clarify the trust's income tax status by including provisions establishing that during the retained interest term, the trust is a grantor trust under IRC Sections 671-679, with all income, deductions, and credits attributable to the trust property reported on the grantor's personal income tax return. Specify that the grantor is responsible for paying all income taxes attributable to the trust property, including property tax deductions, mortgage interest deductions if applicable, and any rental income if the property is leased to third parties. Explain that this grantor trust status provides a significant additional estate planning benefit because the grantor's payment of income taxes on trust income effectively makes additional tax-free gifts to the remainder beneficiaries by allowing the trust property to grow without income tax erosion.

Address the trust's gift tax reporting requirements by including provisions requiring the trustee to provide the grantor with all information necessary to complete IRS Form 709 (United States Gift Tax Return) for the year of the initial transfer. Specify that the grantor must file Form 709 reporting the transfer to the QPRT, calculating the taxable gift as the fair market value of the residence less the actuarial value of the retained interest term calculated using the Section 7520 rate and IRS actuarial tables. Include language noting that the grantor may elect to allocate generation-skipping transfer (GST) tax exemption to the transfer if the remainder beneficiaries include grandchildren or more remote descendants, though such allocation should be carefully considered because the exemption is allocated based on the full fair market value of the property, not the reduced gift tax value.

Incorporate provisions addressing the trust's estate tax reporting obligations if the grantor dies during the retained interest term. Specify that the trustee must provide the executor of the grantor's estate with all information necessary to include the residence in the grantor's gross estate at its fair market value as of the date of death, and must cooperate with the estate's appraisal process. Address the income tax basis consequences, explaining that if the property is included in the grantor's estate, the remainder beneficiaries receive a stepped-up basis equal to the estate tax value, eliminating built-in capital gains. Conversely, if the grantor survives the term, explain that beneficiaries receive a carryover basis equal to the grantor's adjusted basis plus any gift tax paid attributable to appreciation, calculated under IRC Section 1015.

Termination Events and Property Distribution

Enumerate all circumstances that will cause the trust to terminate, beginning with the natural expiration of the retained interest term assuming the grantor survives. Specify the exact termination date and the trustee's obligations upon termination, including preparation of a final accounting, execution of deeds or other instruments necessary to transfer legal title to the remainder beneficiaries or continuing trust, delivery of all property records and documentation, and filing of any required tax returns or reports. Include provisions requiring the trustee to obtain a final property appraisal as of the termination date to establish the property's value for the beneficiaries' income tax basis records.

Address premature termination due to the grantor's death during the retained interest term, specifying that upon receiving notice of the grantor's death, the trustee must immediately notify all remainder beneficiaries and determine whether the trust property will be distributed according to the trust terms or will be subject to the grantor's will or estate plan. Include provisions clarifying that even though the property is included in the grantor's gross estate for estate tax purposes, legal title remains in the trust and passes according to the trust terms unless the trust instrument provides otherwise. Consider whether the trust should include provisions allowing the property to be used to satisfy estate tax liabilities or other estate obligations, or whether it should pass to beneficiaries free of such claims.

Incorporate provisions addressing termination due to the residence ceasing to be used as a personal residence, being sold without proper replacement, or the trust otherwise failing to qualify as a QPRT under applicable regulations. Specify that in such circumstances, the trust may either terminate with the property reverting to the grantor (which may have adverse gift tax consequences requiring amended returns) or convert to a grantor retained annuity trust with the grantor receiving an annuity for the remainder of the original term. Include detailed conversion provisions that specify the annuity amount, payment frequency, and other terms necessary to satisfy Treasury Regulations Section 25.2702-3 governing qualified annuity interests.

Address the tax and administrative consequences of termination, including the trustee's obligation to provide all beneficiaries with written notice of termination, a final accounting showing all trust activities through the termination date, and a statement of the property's income tax basis for future reference. Specify that the trustee's duties continue until all trust property has been distributed, all tax returns have been filed, and all administrative matters have been concluded, and that the trustee is entitled to reasonable compensation for these final services.

Administrative Provisions and Miscellaneous Terms

Incorporate comprehensive administrative provisions that address the practical aspects of trust operation and interpretation. Include a governing law clause specifying that the trust shall be governed by and construed in accordance with the laws of the designated state, typically the state where the residence is located, though consider choice of law issues if the grantor resides in a different state or if another jurisdiction offers more favorable trust law provisions. Specify that any disputes regarding trust interpretation or administration shall be resolved in the courts of the designated jurisdiction, and consider whether to include alternative dispute resolution provisions requiring mediation or arbitration before litigation.

Include a severability clause providing that if any provision of the trust is found to be invalid, illegal, or unenforceable, the remaining provisions shall continue in full force and effect, and the invalid provision shall be reformed or modified to the minimum extent necessary to make it valid and enforceable while preserving the parties' intent to the greatest extent possible. Emphasize that the trust's primary purpose is to qualify as a QPRT under IRC Section 2702 and Treasury Regulations Section 25.2702-5(c), and that all provisions should be interpreted and administered to maintain this qualification.

Address the amendment process by specifying that while the trust is irrevocable and cannot be amended to alter beneficial interests, the trustee may make administrative amendments that do not affect the grantor's retained interest or the remainder beneficiaries' interests and are necessary to maintain the trust's QPRT qualification, comply with changes in applicable law, or correct scrivener's errors or ambiguities. Consider whether to grant the grantor a limited power to substitute assets of equivalent value for the residence, which may be useful for estate planning flexibility, though such a power must be carefully drafted to avoid estate tax inclusion issues.

Include provisions regarding notices and communications, specifying that all notices required or permitted under the trust must be in writing and delivered by personal delivery, certified mail return receipt requested, or nationally recognized overnight courier service. Provide the addresses for the grantor, trustee, and all beneficiaries, and include provisions allowing parties to change their addresses by written notice to the trustee. Specify that notices are deemed effective upon receipt or, if mailed, three business days after deposit in the U.S. mail with proper postage and addressing.

Creditor Protection and Spendthrift Provisions

Incorporate robust spendthrift provisions that protect the trust property from the claims of the beneficiaries' creditors to the maximum extent permitted by applicable state law. Include language providing that no beneficiary may voluntarily or involuntarily transfer, assign, pledge, or encumber their interest in the trust, and that no creditor of any beneficiary may reach the beneficiary's interest through attachment, garnishment, execution, or other legal process. Specify that these restrictions apply both during the retained interest term and after term expiration if the property continues in trust for the beneficiaries.

Address the extent to which the trust property is protected from the grantor's creditors during the retained interest term, noting that because the grantor retains the right to occupy the residence, some jurisdictions may allow creditors to reach this retained interest. Include provisions specifying that after the retained interest term expires, the grantor has no further interest in the trust property and the grantor's creditors cannot reach the property regardless of whether the grantor continues to occupy it pursuant to a rental arrangement with the beneficiaries.

Consider including provisions addressing exception creditors who may be able to reach trust assets despite spendthrift protections, such as providers of necessities, child support and alimony claimants, and governmental entities seeking to collect taxes. Specify how the trustee should respond to claims from such creditors and whether the trustee has discretion to resist claims or must honor them. Include indemnification provisions protecting the trustee from liability for good faith decisions regarding creditor claims.

Document Assembly and Execution Requirements

Prepare the complete QPRT agreement as a formal legal instrument with professional formatting that includes a descriptive title such as "Qualified Personal Residence Trust Agreement of [Grantor's Full Name]," article and section numbering using a hierarchical structure, and clear headings that identify each major provision. Ensure the document flows logically from foundational provisions through operational terms to termination and administrative provisions, with internal cross-references that use section numbers rather than page numbers to maintain accuracy if the document is later amended or reformatted.

Create a signature page that includes signature lines for the grantor with a statement that the grantor executes this trust agreement on the date specified and acknowledges understanding of its irrevocable nature and tax consequences. Include a signature line for the trustee with an acceptance statement if the trustee is someone other than the grantor, acknowledging acceptance of the fiduciary duties and responsibilities set forth in the trust instrument. Provide spaces for witnesses as required by applicable state law, typically requiring two disinterested witnesses who are not beneficiaries of the trust, along with their printed names and addresses.

Include notarial acknowledgment blocks that comply with the requirements of the state where the document will be executed and the state where the residence is located if different, as the deed transferring the property to the trust will need to be recorded in the land records. Ensure the acknowledgment language is sufficient for recording purposes and includes the notary's seal, signature, commission expiration date, and any other information required by local recording statutes.

Prepare comprehensive exhibits and schedules to be attached to the trust agreement, including Exhibit A containing the complete legal description of the residence exactly as it appears in the current deed, Exhibit B listing all remainder beneficiaries with their complete identifying information and percentage interests, and any other schedules necessary to fully document the trust property and beneficial interests. Ensure all exhibits are properly referenced in the body of the trust agreement and are signed or initialed by the grantor and trustee to prevent later substitution or alteration.

Ancillary Documents and Post-Execution Requirements

Draft all ancillary documents necessary to implement the QPRT and transfer the residence to the trust, beginning with a deed conveying the property from the grantor individually to the grantor as trustee of the QPRT. Ensure the deed complies with all local recording requirements including proper formatting, font size, margin specifications, and inclusion of all required information such as the preparer's name and address, return address, and any required tax parcel numbers or legal descriptions. Include appropriate consideration language and any required transfer tax declarations or exemption claims.

Prepare detailed instructions for completing IRS Form 709 (United States Gift Tax Return) for the year of the transfer, including step-by-step guidance for calculating the actuarial value of the retained interest using the applicable Section 7520 rate and IRS Publication 1457 actuarial tables. Provide worksheets showing the calculation of the taxable gift as the fair market value of the residence less the value of the retained term interest, and explain how to report the transfer in Schedule A of Form 709. Include guidance regarding the election to allocate GST exemption if applicable, and explain the consequences of making or not making this election.

Create a comprehensive post-execution memorandum to the client explaining all actions that must be taken after the trust is executed and the property is transferred. Specify that the grantor must file Form 709 by April 15 of the year following the transfer or obtain an extension, and must attach a complete copy of the trust agreement and the appraisal to the return. Explain the need to obtain a new property and casualty insurance policy in the name of the trust, with the trustee listed as the insured party, and to notify the insurance carrier of the change in ownership. Address the need to update property tax records to reflect the trust's ownership, though note that most jurisdictions do not reassess property transferred to a grantor trust.

Include detailed guidance regarding the consequences of surviving or not surviving the retained interest term, explaining that if the grantor survives, no further tax reporting is required and the property passes to the beneficiaries as specified in the trust, but if the grantor dies during the term, the executor must include the property in the estate tax return at its date-of-death value. Provide guidance regarding post-term occupancy arrangements, emphasizing the critical importance of paying fair market rent if the grantor wishes to continue living in the residence after the term expires, and explaining how to establish and document an arm's-length rental arrangement.

Address ongoing compliance and administration requirements, including the trustee's obligation to maintain detailed records of all trust receipts and expenditures, file annual accountings with the grantor during the term and with the beneficiaries after the term expires, and ensure that property taxes, insurance premiums, and maintenance costs are paid timely. Explain the grantor's ongoing income tax reporting obligations, including the need to report all income and deductions attributable to the property on the grantor's personal return and to maintain adequate records to substantiate the property's income tax basis for future reference.

Your final work product should be a complete, professionally drafted QPRT agreement that is ready for attorney review and client execution, accompanied by all necessary ancillary documents and implementation instructions. The document should reflect sophisticated estate planning expertise, meticulous attention to tax law requirements, and practical consideration of the family dynamics and property management issues that will arise during the trust's administration. Every provision should serve a clear purpose in achieving the client's estate planning objectives while maintaining full compliance with applicable tax regulations and state trust law.