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Higher Interest Rates Have Made a Qualified Personal Residence Trust (QPRT) A More Effective Estate Tax Reduction Device

  • By: Alan Sohn
  • Published: February 26, 2024
While Christmas has passed, it is still a good time to consider the gift of transferring a primary or secondary residence from the senior generation to the next generation. Why is that? Because
the higher interest rates which are now in place, will result in the calculation of a higher value of a retained right to possession and a reduced use of the federal estate tax exemption.
What is a QPRT? It is a way to transfer property to loved ones with a reduced gift tax value by transferring the title, but not the right to possession of a family residence for a term of years. Commonly, the transfer is of a primary residence or vacation home.
It is accomplished by transferring the title of the property to an irrevocable trust, while retaining the right to possession for a term of years. The taxable gift is, thereby, reduced by the value of
the retained right of possession. At the end of the term, assuming the grantor or grantors outlive the term, the ownership of the entire property is transferred to the remainder beneficiaries without incurring an exorbitant wealth transfer tax burden.
As with all gifts of significant value, a gift tax return is required that is supported by an appraisal; however, the gift tax return will not be due until April 2025 for a gift in 2024. If the grantor outlives the term, the grantor may remain in session by leasing the residence for fair market value. If the grantor fails to outlive the term, the property is brought back into the grantor’s estate. In the latter case, the only costs incurred are the fees of the attorney and the appraiser.
Many families of moderate or high net worth are considering how to reduce their taxable estate due to the scheduled 50% reduction of the federal exemption as of January 1, 2026. The exemption is expected to land at about $6M. A QPRT is a painless way to reduce your estate tax exposure, as you will not have given away your right to live in the family and/or vacation residence, while reducing the ultimate estate tax burden on your heirs.
If you would like to discuss whether a qualified personal residence trust is beneficial for your family, please do not hesitate to contact me.
(c) Alan E. Sohn
Alan E. Sohn

Alan E. Sohn received his Juris Doctorate from the College of Law of the
University of Illinois. Mr. Sohn has been a partner in both large and
smaller law firms and for the past 21 years has been in private practice.