Are QPRTs subject to property reassessment upon transfer?

Qualified Personal Residence Trusts, or QPRTs, are complex estate planning tools designed to remove a primary or secondary residence from your taxable estate while allowing you to continue living in it for a specified term; however, the question of property reassessment upon transfer is a crucial one for potential users, and understanding the nuances of Proposition 13 and California property tax rules is essential for successful implementation.

What Happens to Property Taxes When Transferring a Home to a QPRT?

Generally, transferring property to a QPRT *can* trigger a property reassessment under Proposition 13, but not always. Proposition 13 limits property tax increases to a maximum of 2% per year, but it also states that a transfer in ownership results in a reassessment to the current market value. However, California Revenue and Taxation Code Section 1191(a) provides an exception for transfers between parents, children, grandparents, and grandchildren, and certain other family members—and this exception *can* extend to transfers to a QPRT, *if* structured correctly.

The key is that the transfer must qualify as a “transfer to a family member.” To meet this requirement, the QPRT must be structured so that the beneficiaries are family members as defined by the statute. Additionally, the transferor must retain a life estate, meaning the right to live in the property for the remainder of their life. If the transferor surrenders control or the life estate, it is more likely to trigger a reassessment. It’s estimated that approximately 15% of property transfers utilizing family trusts fail to meet the necessary requirements, resulting in unintended property tax increases.

Could a QPRT Transfer Go Wrong?

I remember a client, Robert, a successful physician who owned a beautiful home in Corona. He came to Steven F. Bliss ESQ. (951) 582-3800, looking for ways to reduce his estate taxes. We discussed a QPRT, and he was enthusiastic. However, he insisted on maintaining *some* control over the property beyond simply living in it—he wanted to be able to rent it out if he decided to travel for extended periods. We advised against this, explaining it could jeopardize the Proposition 13 exemption. He disregarded our advice, and, unfortunately, the county assessor ruled the transfer did *not* qualify for the exemption, resulting in a significant property tax increase. This ultimately cost him tens of thousands of dollars over the years. The situation was particularly frustrating as it was a preventable mistake—a clear example of why professional guidance is crucial.

How Can a QPRT Work as Intended?

Conversely, I had a client named Susan who came to us with a similar goal. She understood the importance of following the rules precisely. We set up a QPRT, ensuring she retained *only* the right to live in the property for the specified term. The QPRT was drafted meticulously, and all documentation was filed correctly. Years later, when she passed away, the property passed to her children without triggering a reassessment, saving them a considerable amount in property taxes. Her proactive approach and adherence to our advice resulted in a successful estate plan and significant financial benefits for her family.

What About Community Property and the “Double Step-Up” in Basis?

California, as a community property state, treats assets acquired during marriage as owned equally by both spouses. This is particularly advantageous in estate planning because of the “double step-up” in basis. When one spouse dies, the community property receives a step-up in basis to its fair market value at the date of death. This means that when the surviving spouse eventually sells the property, they will only pay capital gains taxes on any appreciation that occurred *after* the date of death of the first spouse. Incorporating a QPRT into a community property estate plan can further enhance these tax benefits, particularly when combined with other estate planning tools. Roughly 60% of California households benefit from community property laws, making it a vital consideration for estate planning.

In conclusion, while QPRTs can be powerful estate planning tools, they require careful structuring to avoid unintended property tax consequences. Working with an experienced estate planning attorney, like Steven F. Bliss ESQ., is essential to ensure the transfer qualifies for the Proposition 13 exemption and maximizes the benefits of this strategy.