
Sizable estates with values approaching the lifetime gift and estate tax exemption limit—$13.99 million per individual in 2025 and $15 million in 2026—may face federal and state estate taxes, particularly for homeowners in high-cost areas, where rising home values could push their estates into taxable territory.
One solution to this potential problem is a Qualified Personal Residence Trust (QPRT), which lets you transfer your personal residence to an irrevocable trust that grants you the right to live in the house for a specified number of years before passing it to your beneficiaries.
By transferring the asset now, you not only remove the current value of the house and any future appreciation from your estate, but you can also transfer it to your heirs with a reduced gift tax burden.
That's because your trust lawyer first calculates the value of your time in the house under the terms of the trust—a.k.a. your retained interest. They then subtract that amount from the house's fair market value at the time of the transfer to the trust to determine the remainder interest, or reportable gift tax value.
Consider Mary, a 50-year-old widow with a $5 million home she transfers to a QPRT with a 20-year occupancy term. The remainder interest in the home, $1,619,700, is calculated using the home's assessed value, the trust's term, Mary's age, and the prevailing Section 7520 interest rate, which the IRS sets monthly to value gifts for tax purposes. Mary deducts $1,619,700 from her lifetime gift and estate tax exemption, and after 20 years, the home passes to her son with no further gift or estate tax obligation—no matter how much it may have appreciated in the meantime.
Some caveats:
- You no longer own the house: Once your designated trust term ends, you legally lose access. However, you may rent the residence from your beneficiary at fair market value, which would help transfer additional assets to your heirs without affecting your annual gift exclusion.
- You must outlive the trust term: A QPRT is a "bet-to-live" strategy, meaning you must survive the trust term to receive the estate tax advantages. If not, the property is returned to the taxable estate.
- You could face higher property taxes: Depending on where you live, transferring your property to a QPRT could nullify any state and local property tax exemptions, meaning you would be responsible for potentially higher property taxes during the trust's term.
- Your heir won't receive a step-up in cost basis: If the beneficiary sells the home after the trust term ends, any gains will be calculated using the home's fair market value at the time of the trust's creation. In Mary's son's case, if the home were worth $8 million when he decides to sell, he'd owe taxes on the $3 million gain.
QPRTs are complex and not without risks, so it's best to discuss your situation and goals with an experienced CPA or estate-planning attorney.
Schwab can help you set up a trust account.
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This material is intended for general informational purposes only. This should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decisions.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
For illustrative purpose(s) only. Individual situations will vary. Not intended to be reflective of results you can expect to achieve.
This information is not a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager, Estate Attorney) to help answer questions about specific situations or needs prior to taking any action based upon this information.