Using QPRTs to Leverage the Increased Estate Tax Exemptions

Many high-net-worth families have multiple properties that they want to pass on to their heirs without having to deal with large estate tax bills. One possible solution is a Qualified Personal Residence Trust (QPRT). A QPRT is an estate planning strategy used to remove a personal residence or second home from a taxpayer’s estate. It involves setting up an irrevocable trust to transfer ownership of a home, while allowing the grantor to use the home for a period of years, with the remaining interest being passed to the beneficiaries.

Given the current (2024) exemption of $13.61 million ($13.99 million in 2025), combined with higher interest rates, a QPRT is an attractive estate planning option to take advantage of both.

For example, suppose a taxpayer wants to remove a $5 million home from his estate. He can create a 10-year QPRT and transfer the property into it. For gift tax purposes, the value of the gift is discounted due to the retained right for the taxpayer to live in the property during the term of the trust, which results in a value lower than the property’s actual fair market value. During the trust term, he enjoys and continues to live in and use the property. If the taxpayer outlives the trust term, the trust’s beneficiaries will receive title to the property. If the home is worth $7.5 million at that time, he has successfully removed the $2.5 million of appreciation from his estate with no transfer tax cost.

For the QPRT to be successful, the taxpayer must pay fair market rent to the new owner upon expiration of the trust term. If he continues to live in the property rent free, the IRS will likely argue an implied agreement existed and the value of the house will be includable in his estate due to the retained right to possess and enjoy the property.

Here are important considerations to keep in mind when using a QPRT within your estate planning strategy:

• Grantor trust status: A QPRT is treated as a grantor trust for income tax purposes, with all activity being included on the grantor’s individual return.
• Reduced estate value: Using a QPRT helps remove a portion of the value of a residence and any appreciation from the grantor’s estate. The value of the property is locked in during date of transfer so future appreciation passes to heirs, free of tax.
• Outliving the trust terms: For a QPRT to be effective, the grantor must outlive the terms of the trust, otherwise the property would be included in his/her estate again.
• No step-up in basis: Heirs will not receive a stepped-up basis when they inherit the property, meaning any gains from eventual sale of the home will be calculated from the grantor’s original basis (i.e., carryover basis).
• Mortgage considerations: Mortgage payments count as gifts that must be reported on a gift tax return, so using a QPRT for properties that are fully paid off is preferable.
• Improvements to the property: Any improvements made by the taxpayer are also gifts to the trust and must be reported on a gift tax return.

QPRTs are an advanced estate planning tool, and an experienced estate planning attorney should be consulted to ensure the trust is structured in a manner to allow continuous enjoyment of the property by the grantor while meeting IRS requirements.

For more information, contact us. We’re here to help.

Authored by Tom Bazley and Rawsun Akther

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