Learn how a Qualified Personal Residence Trust (QPRT) can optimize your estate planning, offering gift and estate tax savings. Understand key benefits, potential pitfalls, and the urgency to act before 2026 exemption changes. Comerica advisors are here to guide you through the process.
Key Takeaways:
- The Qualified Personal Residence Trust (QPRT) can be an effective tax-saving tool in high interest rate environments. A QPRT can help you pass real estate to heirs.
- With significant exemption reductions in 2026, it's important to act now. Consult with a professional to see if a QPRT is right for you.
- Timing of gifts is critical to efficiently utilize your exemption.
When it comes to gifting real estate, timing matters.
Unfortunately, many estate plans overlook the impact of when and how estate gifts are made. As a result, grantors miss out on the strategic use of exemptions and options such as the Qualified Personal Residence Trust (QPRT). This can lead to increased taxes and pressure on your loved ones.
What is a QPRT?
A QPRT is a strategic estate planning tool that can significantly benefit individuals looking to transfer a personal residence to their heirs while minimizing gift and estate taxes.
The Process
The process of establishing a QPRT involves drafting and executing an irrevocable trust.
The grantor then transfers their personal residence into the trust. This transfer is considered a gift to the beneficiaries, typically the grantor’s heirs. The value of the gift is based on the value of the personal residence, but factors in the grantor's retained interest in the home for a specified term.
The unique structure of the QPRT allows the grantor to continue enjoying use of the property during the trust’s predetermined duration, while also reducing estate and gift taxes. Upon the termination of the trust, the residence is passed on to the trust’s beneficiaries.
Key Considerations
The grantor must outlive the term of the trust. If the grantor does not survive the trust term, the property reverts to being part of the grantor's taxable estate, valued at its current market value. Therefore, it’s important to carefully consider the term of the trust compared to the grantor's age and health.
To mitigate the risk of the grantor not surviving the trust term, an additional strategy involves multiple QPRTs (one for each spouse) for the same residence. This approach reduces the likelihood that the residence will be pulled back into the taxable estate due to the grantor's untimely passing during the term of any single trust.
Simply put, a QPRT is an estate planning tool that allows you to gift real estate, continue living in the property, and realize estate tax savings.
When is a QPRT Appropriate?
Key Benefits of a QPRT
The QPRT offers several advantages for estate planning. Understanding these benefits is key to maximizing the potential of this estate planning tool:
- Gift Tax Savings: One of the primary advantages of a QPRT is the potential for gift tax savings. When a residence is transferred to a QPRT, it is done at a discounted value. This discounted value considers the grantor's retained use of the property during the trust term, resulting in a lower gift tax liability compared to transferring the property outright.
- Estate Tax Savings: A notable benefit of a QPRT is the removal of the residence, along with any future appreciation, from the grantor's estate. This means the full value of the property at the time of the grantor's death is not included in the estate for estate tax purposes. This can result in substantial estate tax savings, especially if the property appreciates in value over the term of the trust.
- Continued Use by the Grantor: During the term of the QPRT, the grantor retains the right to live in and use the residence. This allows the grantor to continue enjoying the residence without disruption, while simultaneously planning for its future transfer.
- High Interest Rate Benefits: In a high interest rate environment, the value of the gift for transfer purposes is reduced. This is because the Internal Revenue Service (IRS) uses the monthly 7520 rate that is tied to interest rates to determine the present value of the future gift to the beneficiaries. Higher interest rates result in a lower present value, reducing the amount of lifetime exemption required.
Potential Pitfalls
While a QPRT offers many benefits, it's important to be aware of potential drawbacks:
- Requirement to Pay Rent Post-Term: Upon the conclusion of the trust term, if the grantor wishes to continue living in the property, they must pay fair market rent to the trust's beneficiaries. This arrangement can be emotionally and financially challenging, as it involves paying rent for a home the grantor previously owned.
- Risk of Asset Reversion: If the grantor does not survive the trust term, the property is pulled back into their taxable estate at its current market value. This situation nullifies the tax benefits of the QPRT by bringing in the appreciated value back into the taxable estate.
- Avoiding Mortgaged Properties: Mortgages can complicate the QPRT process. It's typically easier to use unencumbered property to avoid these complications and ensure a smoother transfer process.
Common Uses of a QPRT
The benefits of a QPRT are most often seen in these scenarios:
- Secondary Residences: QPRTs are often used for second homes or vacation properties, allowing for efficient transfer while maintaining usage rights.
- Utilization in High Interest Rate Environments: Given that high interest rates can lower the gift tax value of the property transferred, QPRTs are particularly advantageous in high-rate financial climates.
QPRTs can lead to significant gift and estate tax savings. But it’s important to understand the potential drawbacks of this strategy.
What’s Changing in 2026?
The current exemption amounts are set to sunset in 2026. This sunset will cause exemption amounts to revert to the pre-2018 exemption amounts, resulting in a significant reduction to the exemption amounts.
The effectiveness of a QPRT, with its ability to transfer real estate at a fixed value, becomes even more noticeable under these circumstances. By locking in the current higher exemption rates, you can maximize tax savings before the sunset takes effect, and the exemption is effectively cut in half.
The Time to Act is Now
Given these upcoming changes, now is a crucial time to consider whether a QPRT is the right strategy for you.
As 2026 approaches, more individuals are looking to optimize their estate plans. This has led to increased demand for professional advice from attorneys and accountants. Tax and estate professionals are already seeing a surge in clients, and their availability is becoming more limited as they reach peak capacity.
As 2026 changes get closer, setting up a QPRT will be harder to accomplish.
Take Advantage of a QPRT Today
Are you planning to leave real estate to your loved ones? If so, a QPRT can be a powerful tax-saving tool. With the upcoming exemption changes and higher interest rates, now is the best time to discuss your estate strategy with a professional and make plans for the future. Work with your Wealth Relationship Manager at Comerica. Our knowledgeable advisors can help you analyze the benefits and potential drawbacks of estate tools like the QPRT. Contact your Comerica Relationship Manager or contact Comerica today.
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