With the Tax Cuts and Jobs Act’s higher lifetime gift and estate tax exemption scheduled to be halved at the end of 2025, many wealthy taxpayers are scrambling for ways to reduce their estates and minimize the effect of high estate tax rates. One valuable tool is a qualified personal residence trust (QPRT). These vehicles are especially attractive given the uptick in interest rates over the last few years.

QPRT Basics

QPRTs provide a method to remove the value of your home from your estate but still allow you to continue to live in it. With a QPRT, you create an irrevocable trust and transfer the property’s title to it, retaining the right reside there for a specific term. You don’t have to pay rent during that time, but you’re responsible for all expenses, such as property taxes and maintenance.

At the end of the term, the trust terminates, and the property passes to your beneficiaries, free of estate or gift tax. Appreciation passes tax-free, too, making QPRTs particularly effective in housing markets where values are soaring.

You can continue to live in the home after the term ends, but you must pay market-value rent to the beneficiaries. The rent payments serve as another method for transferring money to the beneficiaries without incurring estate and gift taxes. But the rent is taxable income for the beneficiaries. If the beneficiaries decide to sell the home, the resulting capital gains tax will likely be far lower than estate tax would have been.

Important: You must survive the trust term to reap the tax benefits. If you don’t, the current value of the home will be included in your taxable estate. Therefore, it’s critical to designate a term you’re likely to survive.

You should weigh the impact on other taxes. For example, the initial transfer could trigger a reassessment of your property taxes or make the home ineligible for exemptions, leading to more liability. In addition, transferring appreciated property through a QPRT means the beneficiaries won’t receive the benefit of stepped-up basis. When they sell the home, gains will be based on its carryover basis from the grantor plus any improvements made after the transfer to the QPRT.

Role of Interest Rates

The initial transfer of your home to the QPRT is considered a taxable gift, but the value of the gift is less in high-interest rate environments. And the relevant interest rate — known as the Section 7520 rate (120% of the applicable federal midterm rate) — has increased from 4.8% in February 2024 to 5.6% in June 2024. By comparison, the Section 7520 rate was only 1.2% in June 2021 and 0.6% in June 2020.

Specifically, the gift’s value is reduced by your retained interest in the property (that is, your right to continue living there for the term). The value of your interest is based on the Section 7520 rate. As the Section 7520 rate increases, so does the value of your interest, which is deducted from the value of the gift. The longer the trust term, the greater the value of your interest — but also the greater the risk that you’ll pre-decease the term expiration, defeating the purpose of the QPRT.

Don’t Delay

With the expiration date for the current estate tax exemption nearing, more people will be reaching out to their advisors for strategies to mitigate the effects.