A personal residence trust allows individuals to gift their home to loved ones in a way that can significantly reduce the resulting gift taxes. The original owner is allowed to live in the home, discounting the home’s usable value in the process.
At the same time, they lock in the home’s value, as far as gift tax assessments are concerned, which could result in significant gift tax savings for homes that are likely to greatly appreciate in value.
There are many technical factors to consider before deciding that a personal residence trust is right for you. Foremost, you have to determine if you would otherwise be in danger of exceeding your lifetime gift tax exemption amount.
You also have to be positive that you want your home to go to the beneficiary, since the trust is irrevocable. On top of all of this, you have to select a trust duration that you are likely to survive, since the home reverts back to your estate if you die before the trust’s term expires.
Working with an Albuquerque personal residence trust lawyer can help you determine if a personal residence trust offers advantages for you and your family. Talk to an experienced attorney at New Mexico Financial Law when you call us at 505-503-1637 or contact us online to schedule a no-obligation consultation.
Forming a personal residence trust makes sense for certain families and certain properties. It can offer substantial benefits if you are otherwise at risk of exceeding your lifetime gift tax exemption amount.
Your beneficiary may also feel tremendous gratitude regarding the arrangement, since they are officially designated to receive the home at a later date.
Before jumping into such a major decision, it helps to explore all of the opportunities it offers, as well as any possible risks it could introduce.
Remember that placing your home into the ownership of an Albuquerque personal residence trust is a very serious commitment. The person placing their home into a trust (known as the grantor) must be secure in their relationship with the beneficiary since the terms of the trust are irrevocable. Property owners should put careful research into their decision, including obtaining a home appraisal.
In addition to these considerations, you will need a trust agreement that protects your investment and gifting decisions. You want the trust to be capable of resulting in the outcome you seek, with minimal risks.
Your trust arrangement should also include the forethought needed to anticipate possible contingency arrangements for any risks that could emerge.
This is where an Albuquerque personal residence trust attorney can come in. They can help you not only put in the necessary due diligence but also draft a solid trust agreement that protects all of your biggest priorities.
When you come to New Mexico Financial Law, we can help you with critical tasks needed to establish your trust. By working with an experienced Albuquerque personal residence trust lawyer, you can receive personalized service and knowledgeable guidance, helping set your trust up for success.
Some of the considerations we can help you with include:
A personal residence trust — often referred to as a qualified personal residence trust (QPRT) — officially transfers ownership of a home to a trust for a set number of years. After the trust’s term has ended, ownership of the home is transferred from the trust to a beneficiary, and the trust dissolves.
One key aspect of a qualified personal residence trust is that it is irrevocable. This means that the trust cannot be altered or dissolved once it is put in place.
It may be possible to dissolve the trust if the beneficiary agrees to it, but doing so may require a court order. Further, any tax arrangements would be null, so the grantor may end up owing back taxes or penalties as a result.
During the years the home is technically owned by the trust, the grantor (i.e., the creator of the trust and the original owner of the home) is allowed to remain living there. In fact, their ability to use the home is key to the arrangement, since their use of the home takes away from the “present value” of the home to the beneficiary every single year they cannot take full possession of it.
When the trust term ends, the beneficiary then receives the title to the home. Since the arrangement to allow the grantor to live in the home decreases the present value, the grantor gets to discount the gift value of the home, as far as gift taxes are concerned.
This arrangement can be particularly beneficial if the home has a significant value, which might otherwise have caused the grantor to exceed their lifetime gift tax exemption. Normally, in situations where someone’s lifetime gift tax exemption is exceeded, they are expected to pay gift taxes any time they give a gift (i.e., a transfer below fair market value) to a non-charitable recipient.
Gift taxes typically equal 40% of the gift’s transfer value for any gifts made by someone who has exceeded their lifetime exemption amount. The gift transfer value equals the total fair market value of the gift minus the cost (if any) paid by the gift recipient.
When the personal residence trust is formed, the home’s expected present value to the beneficiary is calculated in advance using the IRS’s Sec. 7520 rate.
The rate reduces the home’s value on a yearly basis, which factors in the beneficiaries’ delayed ability to use and assume full ownership of the property.
Note, however, that the beneficiary is still expected to pay capital gains on the sale of the home should they decide to sell the home at a later date. The home’s value will be “stepped-up” in basis at the time it is transferred to the trust, meaning its acquisition value (e.g., the purchase value) is adjusted to match the value at the time of the transfer.
After this point, any further gains in value will be taken into consideration if the home is later sold, which results in “realized” gains.
For example, a home purchased in 2001 for $750,000 may be transferred into an Albuquerque personal residence trust in 2025, when its value has soared to $2.5 million. After 10 years, the home is transferred to the trust’s chosen beneficiary.
By this point, the home’s value could hypothetically be $4.5 million. If the beneficiary immediately sells the home, they are responsible for paying taxes on $2 million of capital gains — covering the gains from the time the home was transferred into the trust up until the sale, but not covering the additional $1.75 million that occurred by the time the home was transferred into the trust.
At the same time, the home’s gift value would be discounted using the IRS’s Sec. 7520 rate. The rate in March 2025, for example, was 5.6%.
Since the home’s discounted value is pre-calculated, the gift tax arrangement presumes its final value will be $1.4 million.
Because of this calculation, it makes the most sense to form a personal residence trust in Albuquerque when the Sec. 7520 rate is high.
Unlike most other trusts, a QPRT can legally only hold a home and not other typical assets, like retirement accounts or life insurance policies. However, the trust can also hold some additional funds to pay for minor repairs, property taxes, insurance premiums, etc.
Once the Albuquerque personal residence trust terminates, the grantor doesn’t have to move out. Instead, they can remain in the home — but only if they agree to pay fair market value rent to the beneficiary. This market value will be calculated based on rents charged for similar homes in the area.
Any arrangement that allows the grantor to remain in the home for less than fair market value counts as a gift to the grantor — it could also potentially result in IRS scrutiny regarding the trust arrangement.
Below, we have provided some quick answers to additional questions you may have about personal residence trusts. Note that these trusts are subject to possible changes to state and federal law.
Therefore, you should always consult with financial and legal professionals to understand how the trust arrangement would affect you personally, especially in the event of an unusual circumstance.
If the grantor dies before the trust term expires, the home reverts to their estate. This reversion could trigger potential gift and estate tax implications, so it is advisable to choose a reasonable term that the grantor is likely to survive, based on their current age and health outlook.
Yes, but having a mortgage greatly complicates the trust arrangements. While interest paid on the mortgage does not count as an additional gift, payments on the principal amount do.
Therefore, every mortgage payment triggers the need to account for the gift, on top of other tax considerations.
Repairs and regular maintenance are allowed, but the grantor should take care to only restore the house to its former condition.
Any substantial improvements to the home, whether they are performed after a damaging event or not, would count as an additional gift since they would represent a “capital improvement.” This additional amount can be accounted for within the personal residence trust, though, so making improvements is not necessarily a bad idea, so long as the improvements are kept reasonable and only made a few times during the trust’s term period.
Yes. The grantor must either take full residence in the home during the trust period or make substantial use of the property, to the extent that the beneficiary is unable to take full possession and enjoyment of the asset.
This inability to use the home is the basis for discounting its value.
Yes, but the proceeds of the sale then have to be put towards the purchase of an equivalent residence, which is subject to the same terms as the previous one.
Yes, your QPRT can include one personal residence and up to one more non-primary-residence property.
However, you should be careful to avoid letting the beneficiary have full “possession and enjoyment” of the vacation property, since this may negate the basis for a discount of the home’s present value.
Yes. Fractional personal residence trusts are possible, but they require additional accounting and administrative considerations.
Refer to an experienced Albuquerque trust law firm for more guidance.
Interest rates are currently high, as of the time of writing this page. That means that the discounted value of a home could potentially result in higher gift savings for your estate.
If you are interested in using this unique trust arrangement to reduce the gift or estate tax burden on your loved ones, reach out to New Mexico Financial Law for a no-obligation consultation. Discuss your options — including how to factor your properties into your overall estate plan — when you call 505-503-1637 or contact us online to schedule an appointment today.
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