As 2026 Approaches Clients Ask About QPRT’s
If you do not own a house, any house, and/or your total assets including real estate on the date of your death will very likely not exceed $5,000,000 you probably could skip reading this column – that would be unless your curiosity is piqued or you think your financial picture might change. Real estate generally appreciates in value over time and you might experience other good fortune.
Recently, though, some clients have approached me with the question “should we consider a QPRT?” Since QPRT (Qualified Personal Residence Trust) discussions have not over the past several years been a hot topic for discussion I wondered why. Then it finally hit me – the federal estate tax laws are scheduled for a major change effective the stroke of midnight December 31- January 1, 2026. Some individuals and couples might want to get ahead of the curve. They may consider it an estate tax planning tool and/or way to transfer real estate over time to a next generation.
Here is the potential estate tax difference between now, 2024, and January 1, 2026. Now, the federal estate tax individual exclusion from tax is $13.61 million ($27.22 million per married couple). If one spouse dies leaving everything to the surviving spouse there is an unlimited marital deduction. However, when the spouse dies without other planning the succeeding beneficiaries (usually the children) may be subject to the tax.
Under the Tax Cuts and Jobs Act of 2017 the individual exemption is scheduled to “reset” to $5,000,000 indexed for inflation which is, of course, much lower than the current $13.61 million. One of the intended effects of a QPRT is essentially to reduce the value of the personal residence asset for death tax purposes by transferring it over time to a specific type of irrevocable trust. Like all tax breaks there are exceptions, caveats, rules that need to be followed and so on. It is not something for which you should fire up your computer to locate a
handy tax program. Frankly, I question whether the precipitous drop in estate tax exemptions will occur at least not at the rate predicted. Similar heated discussions of the federal estate tax occurred the last time there was a proposed dramatic change to totally eliminate the federal estate tax in 2010 and replace it with carryover basis for capital gains. That lasted for less than a year.
So, how does a QPRT work? The owner(s) transfer the property to a specific type of irrevocable trust to remove it from the owners’ estate. This is a gift to the heirs (usually owner’s children) but with a retained interest by the owner. (This, by the way, uses up some of the amount exempted from estate/gift tax). The grantor/owner can continue to use and enjoy the property but with a catch – a term is established after which the trust beneficiaries become the owners. At that point the owner/grantor may need to pay “rent” to live in the property he originally owned. The other issue is that the former owner/grantor must outlive the established term. If he/she/they die before the end of the
established term the property goes back to being part of the owner/grantor’s estate and the tax benefits are lost.
What kind of property might be considered for a QPRT? Remember again if you are thinking of a $500,000 house and an overall estate with value on death including real estate of less than $5 million a QPRT is most likely not needed for federal estate tax planning purposes even under the proposed radical change to the deduction. It might be considered a way to gradually transfer property to children. You should want to have very good relations with your children/beneficiaries first and that could change. Also, you and your spouse have a great deal of protection from federal estate tax now without it. However, here are some other considerations.
First, you probably do not want to use this kind of planning tool if there is a current mortgage on the property. The process is confusing enough that dealing with a lender adds its own complications.
Second, if you own more than one property you might consider the vacation property for this type of structuring instead of your personal residence. You might not want the potential of paying “rent” to your children. Also any action like this would need to be considered in conjunction with the rest of your estate plan and with taxation on trusts.
About the Author Janet Colliton
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.