Protecting Your Home for Future Generations with a Qualified Personal Residence Trust

Do you own your principal residence or a second home? If so, you may already know the financial advantages of homeownership: equity build-up, current tax breaks, and the potential for a tax-exempt gain when you sell. But did you know that your home can also play a key role in your estate planning strategy?

By transferring ownership of your home into a Qualified Personal Residence Trust (QPRT), you can reduce your taxable estate while continuing to live in the home during the trust’s term. Once the term ends, ownership passes to your beneficiaries, allowing you to preserve wealth and potentially avoid estate taxes.

How a QPRT Works

When you transfer your home to a QPRT, it’s removed from your taxable estate. While this transfer is considered a gift, any resulting gift tax is typically reasonable, thanks to IRS rules. The IRS determines the tax based on the Section 7520 rate, which is updated monthly. For example, in September 2024, the rate was 4.8%, down from a high of 5.6% in June.

A trustee—often the grantor, though it can be a family member, friend, or professional advisor—will manage the trust. While most QPRTs are set up for a principal residence, they can also be used for secondary properties, like vacation homes.

What Happens If You Pass Away During the Trust Term?

If you pass away before the QPRT term ends, the home returns to your taxable estate. While this may seem like a disadvantage, your family is no worse off than if you hadn’t created the QPRT in the first place.

To minimize this risk, it's important to carefully consider the trust term. The longer the term, the smaller the taxable value of the remainder interest. However, you’ll want to choose a term that you’re likely to outlive, so the home doesn’t revert to your estate.

If you decide to sell the home while the QPRT is in effect, the proceeds must be reinvested in another home, which will then become part of the trust and follow the same rules.

Financial Responsibilities While Living in the Home

Even though your home is owned by the trust, you remain responsible for paying the property’s ongoing expenses. This includes monthly bills such as property taxes, maintenance, repairs, and insurance. Fortunately, because the QPRT is a grantor trust, you can still deduct qualified expenses on your tax return, subject to usual IRS limitations.

Consider the Drawbacks

At the end of the QPRT’s term, ownership of the home transfers to the beneficiaries. If you wish to continue living in the home, you’ll need to pay them fair market rent. While it may feel unusual to pay rent for a home you once owned, this rental arrangement can further your estate planning goals by shifting additional wealth to younger generations.

It’s also important to note that a QPRT is an irrevocable trust, meaning you cannot modify or undo the arrangement. The potential downsides? Either paying rent to live in the home or having the home revert to your estate if you pass away before the trust term ends. Also, any rental income your beneficiaries receive will be subject to income tax.

Is a QPRT Right for You?

A QPRT can be a powerful estate planning tool, but it’s not suitable for everyone. Factors such as your health, the value of your home, and your overall estate plan need to be considered.

HoganTaylor Estate Planning Services

HoganTaylor estate planning professionals leverage their tax and business advisory expertise to help individuals accomplish goals and minimize tax burden. If you have any questions about the content of this publication, or if you would like more information about HoganTaylor's Estate Planning services, please contact Dan Bomhoff, Estate Planning Lead.

INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.