Gabriel Katzner - July 26, 2022 - Estate Planning
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Why you might need This Trust in the Future?

According to the Internal Revenue Service, an estate tax is a tax on your right to transfer your property upon your death.

The combined estate and lifetime gift tax limit for 2022 is $12,060,000, a very generous amount when compared to 2004-2005, which was $1,500,000.

This generous limit has made it possible for people with large estates to avoid estate taxes, which have been as high as 60% during this period, without needing other complementary estate protection strategies.

Whether estate tax exemption rates will remain at this high level is uncertain. Every time there is a shift in political goals, there is the potential that the estate tax exemption rates will be decreased to fund new programs.

For this reason, families with large estates need to be aware of other ways to reduce the value of their taxable estate. One such method is the qualified personal residence trust.

What is a Qualified Personal Residence Trust?

A qualified personal residence trust is an irrevocable trust that allows its creator to move their personal home from their estate into their trust. This reduces gift taxes incurred when the home is transferred to the beneficiaries.

The taxpayer who owns the home must retitle the home in the trust’s name with the local property registry.

The grantor (homeowner, taxpayer) retains the right to live in the home for a specific number of years.

This is called the term or the retained interest. Because the homeowner retains the right to live in the home for a period, the gift value of the home can be discounted under federal tax law.

The longer the term the homeowner chooses to live in the home, the bigger the valuation discount.

Once the term is up, the grantor loses the right to live in the home. Instead, the beneficiaries, usually the grantor’s children, assume ownership of the home.

Ownership of the home can be:

  • Outright if the trust terminates at the end of the term when the home is transferred
  • In a trust, if the trust is continued to protect the assets

If the grantor would like to continue to live in the home, they can rent it at fair market value. This allows the grantor to pay rent as a tax-free transfer to the trust, further benefitting the beneficiaries.

What are the Benefits of a Qualified Personal Residence Trust?

There are several benefits for grantors of a qualified personal residence trust, including:

  1. Transferring a home during your lifetime incurs less tax liability than if the home was transferred to your beneficiaries upon your death.
  2. The homeowner/grantor can live rent-free in their home for the term period.
  3. The homeowner/grantor can pay rent to the trust over a specified period of time, further reducing the property’s taxable value.
  4. Transferring your home to your trust negates a concern about the effect of an appreciation of home value over subsequent years.
  5. The trust can hold the home for the beneficiaries, providing significant asset protection from the beneficiaries’ creditors, divorcing spouses, bankruptcies, and other claims.

What are the Potential Drawbacks of a Qualified Personal Residence Trust?

Establishing a qualified personal residence trust can provide many benefits, but there are a few potential drawbacks to consider as well:

  1. Legal and professional fees are associated with forming, funding, and tax reporting for a qualified personal residence trust.
  2. Placing a home in a trust can result in a reassessment of property tax liability and higher property taxes, or losing certain property tax exemptions or abatements.
  3. If the grantor outlives the term of residence, they will end up paying rent to live in their home, which can present challenges for some families.
  4. Beneficiaries may incur high-income taxes if they choose to sell the property at the end of the term. This is because transferring the home to the trust causes it to have a carryover basis in the hands of the beneficiaries.
  5. The home has a mortgage, accounting can become very complicated. For this reason, homeowners/grantors should consider a qualified personal residence trust only if their home is fully paid off.

Important Caveats to Keep in Mind

There are important terms a qualified personal residence trust must meet in order to qualify for the benefits associated with this kind of trust, including:

  1. All income generated by the trust must be distributed to the trust’s grantor at least annually.
  2. Before the term expires, the trust principal cannot be distributed to any beneficiary other than the grantor.
  3. Other than in some exceptional circumstances, the qualified personal residence trust can only hold one residence with the reserved right of occupancy during the specified term. However, some cash can be held by the trust for short periods of time to pay for trust expenses such as mortgage payments, home improvements, or to replace the home if it is sold with the intent to replace it.
  4. Termination of the trust and distribution of trust property to the beneficiaries before the term has expired is prohibited.
  5. When the residence is no longer used as the grantor’s residence, the trust will no longer qualify as a qualified personal residence trust.
  6. The personal residence is damaged or destroyed to the point that it is no longer habitable, it must be repaired or replaced within two years after the damage has occurred or the expiration of the grantor’s residency term, whichever comes first. If the house is not habitable within this timeframe, it will cease to be a qualified personal residence trust.
  7. The trust cannot sell or transfer the residence to the grantor, their spouse, or an entity controlled by them at any time during the grantor’s residency term or after the term, as long as the trust remains a grantor trust.

Should You Consider a Qualified Personal Residence Trust?

Individuals with a high net worth may consider a qualified personal residence trust to save taxes when transferring their home to the next generation.

A qualified personal residence trust will remove the home’s future appreciation from the value of the grantor’s estate.

People who anticipate their home will significantly appreciate in value and who expect to outlive the stated term for their qualified personal residence trust may want to consider using this trust as part of their estate planning.

It is important to weigh the benefits and drawbacks of a qualified personal residence trust and to seek your attorney’s help, as there are many tax and nontax considerations to make when choosing whether this is an appropriate estate planning tool for you to use.

You can schedule a call with us or reach us directly at 855.631.3457 to learn more about how best to plan today to protect those most important to you.

Gabriel Katzner

In 2002, Gabriel Katzner, the founding partner of Katzner Law Group received his Juris Doctorate with honors from the Fordham University School of Law. After spending the first 7 years of his legal career
practicing at Cahill Gordon & Reindel LLP, an international law firm based in New York, he went on to found his own firm.

Gabriel Katzner has a track record, along with a vast number of
outstanding public reviews across platforms, of working hard on behalf of individuals who need assistance with comprehensive
estate planning services. Finding a lawyer who is knowledgeable about revocable and irrevocable trust planning, guardianship for minor children, asset protection, trust administration and probate,
as well as Medi-Cal / Medicaid planning is extremely important.

Years of experience: More than 17 years
Location: San Diego, CA


This page has been written, edited, and reviewed by a team of legal writers following our comprehensive editorial guidelines. Furthermore, it has received approval from attorney Gabriel Katzner, an experienced estate planning lawyer with over 17 years of legal expertise.

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