A qualified personal residence trust (QPRT) is set up by the grantor or the author to effect a transfer of his personal residence.
Such trust typically provides that the personal residence is held for the benefit, use and enjoyment of the said grantor for duration of the trust consisting of a specified number of years. On the expiry of the said term the ownership of the property will go typically to the next generation beneficiaries , being the children of the grantor, but need not necessarily be so. These are the remainder men who eventually get the ownership of the residential property.
The transfer of residence by the grantor to the QPRT is a taxable gift for which he is obliged to file gift tax return and liable to gift tax. However, the value of the residence is taken at a discount instead of its full value reducing the gift tax liability resulting from the transfer of residence to the trust.
This is because the value of the gift is only the remainder interest at the end of the grantor’s retained use on the expiry of the term and not the full price of the house.
Once the trust is instituted with the grantor’s residence, the said house and any further appreciation in value of the same is excluded from his personal estate. Consequently on the expiry of the term of his retained use, the property passes to the remainder men with no further estate or gift tax consequences. Moreover, the escalation in the price of the property remains outside the tax net. This is because the value of the property has already been fixed or set at a discount at the commencement of the trust as indicated before and is not open to any revision.
If the grantor dies within the period of his retained interest, the gift tax or estate tax advantage is lost.
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(More http://www.aicpa.org/pubs/jofa/oct2006/king.htm)
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