Homeowners with large estates may be looking for ways to preserve family wealth while decreasing future estate tax exposure as property values continue to rise. A qualified personal residence trust (QPRT) is one strategy that may help accomplish these goals.
QPRT Specifics
A QPRT is an irrevocable trust that allows you to transfer ownership of your primary residence or a secondary residence (such as a vacation home) to it while retaining the right to live in (or personally use) the home for a specified number of years. At the end of that term, ownership of the home typically transfers to the QPRT beneficiaries.
When you transfer a home to a QPRT, it’s generally removed from your taxable estate. But the transfer of the remainder interest going to the beneficiaries is a taxable gift.
The IRS Section 7520 rate, which is updated monthly, is used to calculate the value of the gift for gift tax purposes. The lower the Section 7520 rate, the smaller the remainder interest and the lower the gift tax liability. If the appreciation on the home during the term outperforms the Section 7520 rate and you survive the term, the excess value will be transferred to the beneficiaries gift- and estate-tax-free. For August 2026, the rate is 5.2%.
You can apply a portion of your available lifetime gift and estate tax exemption to the transfer. For 2026, the exemption is $15 million, reduced by any exemption you already have used during your life.
You must appoint a trustee to manage the QPRT. Commonly, the trust grantor (which would be you) will act as the trustee. Alternatively, you can name another family member, friend, or professional advisor.
While you live in the home, you must continue to pay the monthly bills, such as property taxes, maintenance and repair costs, and insurance. Because the QPRT is a grantor trust, as the grantor, you’re entitled to deduct qualified expenses on your income tax return, within the usual limits.
What if you want to sell the home during the term? You generally can do so as long as you reinvest the proceeds in another home that will be owned by the QPRT and subject to the same trust provisions.
Be Aware Of The Risks
A QPRT isn’t without drawbacks. Because the trust is irrevocable, you can’t simply change your mind and reclaim ownership of the home after the transfer. However, you can continue to live in the home after the term ends if the beneficiaries agree and you pay fair-market rent to them.
In addition, the strategy works best if you survive the term. If you die before the term expires, the home is generally included in your taxable estate, largely eliminating the intended estate tax benefits.
The longer the trust term, the smaller the value of the remainder interest for tax purposes. But it’s generally better to choose a term that’s shorter than your life expectancy. Doing so will reduce the chance that you’ll die before the end of the term, causing the home to be included in your taxable estate.
There are also income tax considerations. Unlike property inherited at death, a home transferred through a QPRT generally doesn’t receive a step-up in basis when the trust term successfully ends. As a result, the beneficiaries could face larger (in some cases, much larger) capital gains taxes if they later sell the home than they would have had they inherited it. So, it’s important to weigh potential estate tax savings against potential future income tax liability.
Is A QPRT Right For Your Estate?
If you have a home that’s appreciating rapidly and a large enough estate that estate taxes are a concern, a QPRT is worth a look. However, because it involves complex tax rules, strict IRS requirements, and long-term commitments, a QPRT should be executed only after a thorough review of your financial circumstances and estate planning objectives. We can help you determine if this type of trust is right for you.
