Do You Need a California Qualified Personal Residence Trust?

According to Ben Franklin, nothing is certain but death and taxes, and today that includes gift and estate taxes.

And there is no question that you need to plan for estate taxes. But how can you plan when Congress seems to be forever changing the rates and exemptions? In 1916 the maximum federal estate tax rate was 10%. But from 1942 through 1976 it was 77%.  In 2011 it was 35% and is currently 40%.

The exemption threshold for a single tax filer in 1916 was $50,000. From 1942 through 1976, it was only $60,000. In 2011 the exemption threshold was $5 million. 

Today the estate tax threshold is a generous $12.06 million for single filers and $24.12 million for couples filing jointly.

So, if you were to pass away in 2022 and your combined lifetime gifts and the remaining estate total less than $12.06 million, you would have no federal estate taxes.

But thanks to Congress, that will soon be changing and not in a good way.

Two Looming Problems with the Estate Tax Threshold

Number One. But what Congress gives out, it can also take away. The current estate tax law will expire in 2026 and reset the threshold to $5 million, which will be adjusted for inflation and be around $6.6 million. Congress may, or may not, enact a new tax law before then. 

Your estate tax exemption threshold is affected by the gifts you made during your life. If the threshold is $6.6 million, and you gave away $3 million in gifts to your family or others, your remaining estate tax exemption threshold will be the remaining $3.6 million. Any value above that will trigger a steep 40% tax rate on your estate.

Number Two. Inflation, Rising Real Estate Values, and Great Investments.

If you think your estate won't reach the threshold - consider this. According to, the average price of a house in San Diego is about $850,000 - and that is just the average house. What if your house is twice the average house? And what happens if real estate values keep their meteoric rise for the next few years.

And if you own investment real estate, a second home, rental houses, small apartment buildings, or more, you might easily surpass the threshold.

And suppose you are fortunate enough to have a significant investment portfolio or purchased cryptocurrencies, digital assets, or NFTs at the right time. In that case, your estate might be far above the threshold.

If your estate is going to be above the threshold, what can you do?

One strategy to consider is a California Qualified Personal Residence Trust (QPRT).

The Benefits of California QPRT

A QPRT is an irrevocable trust designed to own a taxpayer’s personal residence. A properly drafted and implemented QPRT offers you many benefits:

● You can transfer your house to the trust during your lifetime for a significantly less tax liability than would occur after your death.

● The future appreciation in your home’s value is removed from the estate.

● You can choose to live in the house rent-free for a period of time.

● The QPRT can hold the residence in continuing trust for the beneficiaries, thereby providing robust asset protection from the beneficiaries’ creditors, divorcing spouses, bankruptcies, etc.

How a California QPRT Works

The first step is to work with your qualified California estate attorney and draft California QPRT that fits your family's needs. Then you gift the property to the trust and transfer your residence by deed.

You retain the right to reside in the home for a specific number of years. As a result, the taxable value of the gift to the QPRT can be discounted under federal tax law.

The longer the term, the greater the gift's valuation discount might be. The grantor's right to live in the home terminates when the term ends. The trust beneficiaries (usually, the grantor's children) receive the residence outright or in a future trust for asset protection purposes.

If you wish to continue living in the home, you can rent it at fair market value from the trust. This action allows you to make additional transfers of cash to the trust for the benefit of the beneficiaries.

For the trust to qualify as a QPRT under federal tax regulations, the following terms must be included.

  1. All income generated by the trust must be distributed to the trust’s grantor at least annually.
  2. The QPRT cannot allow the distribution of the trust principal to any beneficiary other than the grantor before the term expires.
  3. The trust can hold only one residence with a reserved right of occupancy during the specified term and cannot hold any other type of property (with some limited exceptions to help maintain and insure the home).
  4. The QPRT must prohibit termination of the trust and distribution of trust property among the beneficiaries prior to the expiration of the trust term.
  5. The trust must require that if the residence is no longer being used as the grantor’s personal residence, the trust will cease to qualify as a QPRT.
  6. The trust must provide that if the home is damaged or destroyed to the degree that it becomes uninhabitable, the trust will cease to be a QPRT unless the house is repaired or replaced before the earlier of two years after the damage occurs or the expiration of the grantor’s residency term.
  7. The QPRT must not allow the trust to sell or transfer the residence to the donor, their spouse, or an entity controlled by either of them at any time during the grantor’s residency term or at any time after the grantor’s residency term that the trust remains a grantor trust.

In addition to the property, the QPRT can hold cash for a short period of time to allow for the payment of trust expenses such as mortgage payments or home improvements or to allow the trust to purchase a replacement residence should the residence be sold with the intent of replacing it.

Possible Downsides of a California QPRT

As with most things tax-related, there is usually a trade-off whenever you get a tax benefit. Before you decide to use a California QPRT in your estate planning, consider the following:

  • Holding a personal residence in a QPRT might result in a reassessment of property tax liability and higher property taxes or a loss of certain property tax exemptions or abatements.
  • After the QPRT’s term ends, the grantor must give up the right to occupy the residence. If they desire to continue living there, they can only rent the property from the QPRT beneficiaries, which can create an awkward situation in some families.
  • Transferring the residence to the QPRT causes a carryover basis for the beneficiaries, resulting in potentially high-income taxes if they sell the property after the term ends.
  • Transferring a residence with a mortgage can significantly complicate the tax accounting for the property.

What to Do Now

A California QPRT is a sophisticated estate tax planning tool that allows you to transfer your property to the next generation with significant tax savings, both on the transfer and by removing your home’s future appreciation from your estate.

If you already have a high net worth or are on the path to high net worth, you may want to consider using a California QPRT as one tool in your estate plan.

Let us show you how a California QPRT might work for you and your family. 

And although trusts and California trust and estate law may be complicated, this is all we do. 

San Diego Legacy Law is a qualified estate planning attorney firm in San Diego, California.  

We are familiar with all federal and California estate and trust laws. We know how to best help you achieve your estate planning goals, especially how to use trusts to ensure your wishes are carried out.

Call today for a free consultation and learn your next best steps.


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