Austin Texas Estate Planning Blog

A QPRT reduces your taxable estate

QPRT: What Is It and When Should You Consider One? By Austin Estate Planning Attorney Zachary D Kamykowski

April 19, 2022 • | Law Office of Zachary D Kamykowski, PLLC
Qualified Personal Residence Trust: What Is It and When Should You Consider One? Americans have enjoyed historically high estate tax exemption rates for most of the last twenty years. High exemption amounts have kept many of them from seeking out more advanced estate planning strategies. One strategy is the qualified personal residence trust (QPRT). As […]

Qualified Personal Residence Trust: What Is It and When Should You Consider One?

Americans have enjoyed historically high estate tax exemption rates for most of the last twenty years. High exemption amounts have kept many of them from seeking out more advanced estate planning strategies. One strategy is the qualified personal residence trust (QPRT). As an Austin estate planning attorney, I can help you consider whether a QPRT is right for you.

People would plan for estate taxes. because they have been as high as 60 percent historically. However, it is uncertain what the estate tax exemption amounts and rates will be in the future. The current federal administration may decide to reduce the estate tax exemption amounts to reduce economic inequality.

In any case, Congress scheduled the estate tax exemption rate to fall considerably in 2026. Therefore, even those whose wealth is not subject to estate taxes today may need a plan for 2026. Awareness of some of the tried-and-true strategies for reducing your taxable estate’s value can help you preserve your estate.

So, with exemption levels potentially declining, and Austin home values increasing, careful planning becomes more essential. With planning, you avoid paying unnecessary taxes. You also strengthen the impact of your legacy on your chosen beneficiaries - whether family or charitable.

The Benefits of Qualified Personal Residence Trusts

An estate planning attorney can design a QPRT (a specific irrevocable trust) to own a taxpayer’s residence. If designed and implemented correctly, a QPRT offers the taxpayer several benefits:

  • The transfer of the home to the trust beneficiaries during the taxpayer’s life could result in significantly less tax liability than if transferred at the taxpayer’s death.
  • The removal of appreciation in the home’s value over subsequent years from the taxpayer’s taxable property.
  • The taxpayer can continue to live in the home rent-free for some time.
  • The taxpayer can further reduce their taxable property’s value by paying rent to the trust after a specified period.
  • The QPRT can hold the residence in continuing trust for the beneficiaries, thereby providing robust asset protection from the beneficiaries’ creditors, divorcing spouses, bankruptcies, etc.
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Requirements of a QPRT

Generally speaking, a QPRT works because the taxpayer who owns a personal residence must transfer the property by recording a deed with the local property registry retitling the home in the QPRT’s name. Within the terms of the trust, the grantor (the taxpayer) retains the right to reside in the house for a specific number of years (duration). As a result of the taxpayer reserving the right to live in the property, they can discount the taxable value of the gift to the QPRT under federal tax law.

The longer the term, the greater the gift’s valuation discount. The grantor’s right to live in the home terminates when the period ends. At that point, the trust beneficiaries (usually the grantor’s children) receive the residence either outright (if the trustmaker designs the trust to terminate at the end of the term). Or they receive it in further trust for asset protection purposes. Suppose the grantor wishes to continue to live in the home. In that case, they can rent it at fair market value. This allows the grantor to make additional transfers of cash to the trust, transfer tax-free, for the benefit of the beneficiaries.

federal requirements of a qprt

To realize the above benefits, the taxpayer must carefully design and implement a QPRT. For the trust to qualify as a QPRT under federal tax regulations, the trustmaker must include the following terms[1]:

  1. All income generated by the trust must be distributed to the trust’s grantor at least annually.
  2. The QPRT cannot allow the distribution of trust principal to any beneficiary other than the grantor before the term expires.
  3. The trust can hold only one residence with a reserved right of occupancy during the specified term. It cannot hold any other type of property (with some limited exceptions to help maintain and insure the home).
  4. The QPRT must prohibit termination of the trust and distribution of trust property among the beneficiaries before the expiration of the trust term.
  5. The trust must require that if the grantor no longer uses the home as their personal residence, the trust will cease to qualify as a QPRT.
  6. The trust must provide that if the home is damaged or destroyed to the degree that it becomes uninhabitable, the trust will cease to be a QPRT. The grantor must repair or replace the house before the earlier of two years after the damage occurs or the expiration of the grantor’s residency term.
  7. The QPRT must not allow the trust to sell or transfer the residence to the donor, their spouse, or an entity controlled by either during the grantor’s residency term or at any time after the grantor’s residency term that the trust remains a grantor trust.

In addition to the property, the QPRT can hold cash for a short period. This would allow for the payment of trust expenses such as mortgage payments or home improvements. Alternatively, it would enable the trust to purchase a replacement residence. This is allowed should the trust sell the residence with the intent of replacing it.

Possible Downsides of a QPRT

As with most things tax-related, there will be trade-offs that the taxpayer must consider whenever you get a tax benefit. And the same holds for QPRTs. Before you decide to use a QPRT in your estate planning, consider the following:

  • There are typically significant legal and professional fees associated with the formation, funding, and tax reporting of a QPRT.
  • In some states, holding a personal residence in a QPRT can result in the reassessment of property tax liability and higher property taxes or a loss of certain property tax exemptions or abatements.
  • After the QPRT’s term ends, the grantor must give up the right to occupy the residence. If they desire to continue living there, they can do so only by renting the property from the QPRT beneficiaries, which can create an awkward situation for some families.
  • Transferring the residence to the QPRT causes it to have a carryover basis in the hands of the beneficiaries, resulting in potentially high-income taxes if they choose to sell the property after the term ends.
  • Transferring a residence that has a mortgage on it can significantly complicate proper accounting for the tax aspects associated with mortgage payments and deductions. Generally, one should transfer only homes not encumbered by a mortgage.

Who Should Consider Using a QPRT?

A QPRT is a sophisticated estate tax planning tool. It allows homeowners to transfer their property to the next generation with significant tax savings. Tax savings accrue both on the transfer and by removing the home’s future appreciation from the grantor’s estate. Those with an already high net worth who may face estate taxes upon their death and who anticipate high appreciation in their personal residence and expect to outlive a specific term of years may want to consider using a QPRT in their estate planning.

There are many tax and nontax considerations associated with this tool. Therefore, find an attorney and tax professional who can help you weigh the benefits and downsides of using a QPRT. You will need assistance to determine if it is an appropriate tool for your situation. If you would like to learn more about this strategy we are ready to assist you.

[1] Treas. Reg. § 25.2702-5(c)(1).

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