New Jersey Trust Attorney Christine Matus Explains How Qualified Personal Residence Trusts Reduce Estate Taxes

TOMS RIVER, NJ - Homeowners seeking to transfer valuable residences to family members while minimizing estate taxes face complex decisions about timing and structure. New Jersey trust attorney Christine Matus of The Matus Law Group (https://matuslaw.com/what-is-a-qualified-personal-residence-trust/) explains how Qualified Personal Residence Trusts allow homeowners to transfer properties at reduced tax costs while continuing to live in them for a specified term.

According to New Jersey trust attorney Christine Matus, a Qualified Personal Residence Trust works by freezing a home's value for gift tax purposes at the time of transfer. The homeowner transfers the residence into an irrevocable trust and retains the right to live there rent-free for a specific term of years. Because only the future interest in the property is being transferred, not the immediate right to possess it, the taxable gift value is significantly lower than the home's full fair market value.

New Jersey trust attorney Christine Matus emphasizes that the IRS calculates the gift value using complex formulas that consider the home's current value, the length of the trust term, the homeowner's age, and current interest rates, called Section 7520 rates. A longer trust term and a younger age at transfer result in a smaller taxable gift because the homeowner retains the right to live there for more years. When the trust term expires, the home passes to beneficiaries outside the taxable estate, meaning the estate avoids taxation on any appreciation that occurred after the property was transferred.

The IRS limits QPRTs to personal residences only. A primary home qualifies, meaning the house where the homeowner lives most of the year. One vacation home or second residence can also be placed in a QPRT, but investment properties or rental real estate do not qualify. Homeowners can only have two QPRTs at any time-one for a primary residence and one for a vacation home. The property must include a dwelling that is actually used as a residence.

Many Ocean County residents use QPRTs for shore properties in communities like Point Pleasant Beach, Seaside Heights, Lavallette, and Long Beach Island that have appreciated significantly over the years. "Waterfront homes along Barnegat Bay and beachfront properties have seen particularly strong appreciation, making them ideal candidates for QPRTs that freeze value at current prices while passing future growth to children tax-free," notes Matus.

A QPRT makes sense when an estate will exceed the federal estate tax exemption and the homeowner owns a valuable home to keep in the family. Under current federal law, the federal estate and gift tax exemption is $13.99 million per person for 2025 and is scheduled to increase to $15 million per person in 2026. Estates above those amounts may be subject to federal estate tax at rates up to 40 percent.

Attorney Matus points out that homeowners should be relatively young and healthy when establishing a QPRT. Most estate planners recommend this strategy for homeowners in their 50s or early 60s with life expectancies well beyond the proposed trust term. This strategy works best when the homeowner plans to live in the home long-term and has sufficient assets outside the residence to support themselves.

The tax advantages of a QPRT make it one of the most powerful estate planning tools for transferring valuable residences. When a homeowner transfers property into a QPRT, a taxable gift equal to the home's fair market value minus the value of the retained interest is made. For example, a 60-year-old transferring a $1 million home into a 15-year QPRT might make a taxable gift of only $400,000 to $500,000, depending on interest rates. This allows substantial value to be transferred while using less of the lifetime gift tax exemption.

"After the trust term ends, homeowners must either move out, pay fair market rent to continue living there, or structure another arrangement that complies with IRS rules to preserve the estate tax benefits," adds Matus.

The biggest risk with a QPRT is dying before the trust term ends. If the homeowner does not survive the full trust term, the residence is included in the gross estate at its date-of-death value, as if the trust had never been created. The estate tax benefit is lost entirely, and the gift tax exemption used when funding the trust is wasted. For this reason, homeowners should be in good health when creating a QPRT and choose a term that gives a high probability of survival.

Setting up a QPRT involves choosing an appropriate trust term, drafting an IRS-compliant trust agreement, executing and recording a deed in Ocean County, updating insurance, and filing a federal gift tax return. The trust agreement must comply with strict IRS requirements under Section 2702 of the Internal Revenue Code to qualify for favorable tax treatment.

About The Matus Law Group:

The Matus Law Group is a Toms River-based law firm focused on trust and estate planning for families throughout Ocean County and New Jersey. Led by attorney Christine Matus, the firm assists clients in creating customized trusts and estate plans that safeguard loved ones and preserve wealth for future generations. For consultations, call (732) 281-0060.

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