How a QPRT Can Help Reduce Massachusetts Estate Taxes on Your Home
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Why QPRTs Matter More Than Ever for Massachusetts Homeowners
Strategies to address the impact of estate taxes have been getting more attention given that the current lifetime gift and estate tax exemption amounts are scheduled to be cut in half at the end of 2025. New legislation may extend the current high exemption levels, but that is not certain. The current gift and estate tax exemption amounts under the Tax Cuts and Jobs Act (TCJA) of 2017 are $13.99 million for individuals and $27.98 million for married couples in 2025. However, the changes established with the TCJA were not permanent. At the end of this year the exemption amounts are scheduled to “sunset”, reverting to the pre-2017 levels, which accounting for an inflation adjustment, the exemption amounts are projected to be approximately $7.2 million per individual and $14.4 million for married couples.
This may mean that more estates face federal estate taxes, however it’s also important to be aware of estate taxes imposed at the state level. This is especially true in Massachusetts where estates valued over $2,000,000 are subject to a state estate tax, ranging from 7.2% to 16%. Massachusetts residents also deal with living in a high-cost area, where high property values can easily push an estate above the $2m exemption amount.
A solution to this is a Qualified Personal Residence Trust (QPRT), which is an estate planning strategy that can be used to reduce gift and estate taxes at the federal and state level. Most people want their loved ones to inherit their home after they pass away, however the inclusion of the family home in the estate, can trigger estate taxes. With a QPRT a personal residence is transferred to an irrevocable trust that allows the homeowner to live in the house for a specified period before passing the home to beneficiaries.
The key feature of the QPRT is that the home’s current value and any future appreciation is removed from the owner’s estate when it is transferred into the trust, while the homeowners can still enjoy living in their home. This essentially freezes the value of the home at the time the QPRT is created and the home is transferred to the trust.
How a QPRT Works
Create the Trust - The homeowner (grantor) sets up an irrevocable trust—the QPRT—and transfers the home into it.
Retain the Right to Live in the Home - The grantor retains the right to live in the home for a specific term (e.g., 10 or 15 years). During this time, they’re responsible for all expenses—taxes, insurance, maintenance, etc. It is also possible to sell the home while it is owned in the QPRT.
After the Term Ends - When the term ends, the home passes to the beneficiaries (typically children), either outright or in further trust. If the grantor wants to keep living in the home, they must pay fair market rent to the beneficiaries—this can further reduce their taxable estate. The grantor no longer owns the home at the end of the trust term.
Tax Benefit - The value of the gift is discounted for gift tax purposes, based on the retained interest. The longer the retained term, the greater the discount.
If the Grantor Dies During the Term - The full value of the home is included in the estate, and the estate tax benefit is lost.
The key concept with QPRTs is the length of the term that is selected by the grantor. The IRS bases the gift value at a discount based on how long the grantor plans to stay in the home. The longer the homeowner stays in the home, the bigger the discount, however the grantor must survive the term to get the estate tax benefit. Because the homeowner retains value by continuing to live in the home, the gift value of the property is lower than the fair market value of the home at the time the trust is formed. The discounted value of the gift is calculated using the IRS-provided Applicable Federal Rate (AFR).
What happens if the grantor does not survive the term of years set out in the trust? If the grantor dies before the end of the trust term, the house is brought back into the estate and is subject to tax. In this scenario, the homeowner is no worse off than if they hadn’t employed this strategy (other than the cost of the trust).
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Example: Reducing MA Estate Taxes with a QPRT
Sarah owns a home currently valued at $750,000. She lives in Massachusetts and given her portfolio assets and a $1,000,000 life insurance policy, her estate is above the $2m exemption amount in Massachusetts.
Sarah plans to have her children inherit the home anyway, so she establishes a QPRT to reduce her taxable estate. She elects a 15-year term for the QPRT. Using the calculation to determine the gift value – based on the home’s current value, the length of the trust term, Sarah’s age and the prevailing AFR – the remainder interest in the home is $325,000, which is used as the gift value applied to Sarah’s lifetime gift and estate tax exclusion amount. At the conclusion of the 15-year term of the trust, the home passes to the children with no further gift or estate tax owed, regardless of how much the home appreciated in value.
The primary benefits of a QPRT are the potential for significant estate tax savings, the ability for the grantor to remain in the home for the term of the trust and that future appreciation of the home escapes estate taxation. The home’s value is essentially frozen for gift tax purposes when the trust is established.
There are important caveats to consider. The QPRT is irrevocable, so it cannot be undone. The residence cannot be taken back by the grantor. Additionally, the grantor/homeowner must survive the term of the trust for the strategy to be effective. Also, the trust beneficiaries do not get a step up in basis on the home if the grantor survives the trust term and the home passes to the beneficiaries at that point. This could lead to potentially large capital gain issues for the beneficiaries if they sell the house. Normally, these same beneficiaries would have received a step up in basis for the home if it passed through the estate of the parent when they passed away. If the grantor wishes to stay in the home after the trust term, they must pay rent to the beneficiaries at a fair market value.
QPRTs can offer a way to pass a valuable asset such as a home to loved one, but the pros and cons should be considered carefully before employing this strategy. It is important to review all the details with an attorney and your financial advisor to see if this is the right strategy for your estate plan.