Should You Put Your Vacation Home in a Trust? The Answer May Surprise You
Owning a vacation home is one of the most meaningful family investments. Deciding how to protect it and pass it on can be complicated. One option some families consider is a Qualified Personal Residence Trust (QPRT). This tool can reduce federal estate taxes, avoid probate, and still let the owner enjoy the property. But it also has strict rules and risks, especially in North Carolina where state law interacts with federal tax rules.
In this article, we will look at how these trusts affect taxes, probate, Medicaid planning, and inheritance in North Carolina, as well as common mistakes that cause problems. By the end, you will understand the main benefits, pitfalls, and questions to ask before putting a vacation home into a trust.
Why Consider a QPRT for a Vacation Home?
A QPRT lets you transfer a residence (your main home or one vacation home) at a discounted value while keeping the right to live in it for a set term. The IRS reduces the taxable gift because you retain that use. As a result, the home can grow in value outside of your estate, and that appreciation passes to heirs tax free.
When structured correctly, a QPRT can reduce federal taxes, keep the property out of probate, and still allow the owner to enjoy it during their lifetime.
In North Carolina, there is no state estate tax or gift tax, so QPRTs are used only for federal planning. The federal exemption in 2025 is $13.99 million per person, and $27.98 million for couples. Starting in 2026, the One Big Beautiful Bill Act raises it permanently to $15 million per person ($30 million for couples), indexed for inflation. Estates above those limits can face progressive estate tax rates from 18% to 40% on the amount over the exemption.
By moving a vacation home into a QPRT, you reduce the value counted toward the exemption and remove future appreciation from your estate, shrinking or eliminating what could otherwise be taxed at up to 40%.
Another benefit of a QPRT in North Carolina is continued use. During the trust term, you can live in or enjoy the property. After the term, the beneficiaries own it, but you can still use it if you pay fair market rent, which also helps them cover taxes and upkeep. QPRTs also avoid probate, keeping transfers private and efficient.
QPRT’s Role in Medicaid Planning in NC
In North Carolina, a QPRT can sometimes help with Medicaid planning. Medicaid looks at your “available assets” to decide if you qualify for long-term care coverage. If a vacation home is counted as available, you may have to sell it or use its value before benefits begin. But if the home is transferred into a QPRT more than five years before applying, it is generally not counted as an available asset. This can keep the property in the family instead of being consumed by care costs. North Carolina applies a 60-month look-back period on transfers, and it also has estate recovery rules after death, so timing and careful drafting are critical.
When a QPRT May Not Be the Right Fit
QPRTs are not suitable for everyone. They do not work well for homes which are rented out to third parties on a regular basis, since the IRS requires the property to be used as a residence. They can also be problematic if the vacation home has a large mortgage, because paying down principal during the trust term may be treated as extra gifts. A very short life expectancy makes a QPRT risky as well, because if the grantor dies before the term ends, the home is pulled back into their taxable estate and the tax benefit is lost. People who prefer to prioritize the step-up in basis at death, which reduces capital gains for heirs, may also find that a QPRT is not the best tool.
What You Must Know about QRTs in NC: Laws, Rules, and Limitations
A QPRT is irrevocable, meaning it cannot be changed or undone once it is in place. If the grantor dies before the trust term ends, the home is pulled back into the taxable estate and the federal tax savings are lost.
A core drawback is the loss of the step-up in basis. If the grantor survives the trust term, the heirs take the property with the original tax basis. If they later sell, this can lead to higher capital gains taxes. Generation-skipping transfer tax exemptions also do not apply during the trust term, which is another detail to plan around.
A QPRT also has strict rules about the kind of property it can hold. The IRS only allows a personal residence to be placed into this type of trust. It can be your primary home or one vacation home, such as a North Carolina beach or mountain house, but it cannot be a rental property which is mainly used for business. Occasional short-term rentals are not automatically disqualifying, but if the house is primarily rented out, it will not meet the QPRT rules.
The law only allows a person to have two QPRTs at the same time, one for a primary home and one for a secondary or vacation home. If the home is sold during the trust term, the proceeds must be reinvested in another residence or distributed properly, usually within two years, or the QPRT status is lost. When the trust term ends, the owner must pay fair market rent to continue using the property. If no lease is set up, the IRS may treat it as if the owner never gave up control, which can undo the tax benefits.
In North Carolina, QPRTs must comply with the state’s Uniform Trust Code, found in Chapter 36C of the General Statutes. These rules require clear trust terms, proper trustee powers, and defined beneficiaries. Even small drafting errors can have major consequences, including disputes in court or a loss of tax benefits. That is why precise drafting and recording of the deed are so important when setting up a QPRT for a vacation property in North Carolina.
Dying Before the QPRT Term Ends
Why is dying before the QPRT term ends a problem?
If the grantor dies before the trust term is over, the IRS treats the home as if it was never transferred. The QPRT collapses, and the property is pulled back into the taxable estate. That means no estate tax savings, and all appreciation during the trust term is exposed to federal estate tax if the estate exceeds the exemption.
Do heirs still inherit the home?
Yes, but through the estate, not through the QPRT tax shelter. If the estate exceeds the exemption, that portion may be taxed up to 40%.
Is there a silver lining?
Yes. In this case, heirs get a step-up in basis to the property’s market value at death, avoiding capital gains on appreciation during the grantor’s lifetime.
How should families plan for this risk?
Longer QPRT terms create bigger tax discounts but raise the risk of dying before the term ends. Shorter terms give less tax benefit but higher odds of success. The right balance depends on age and health.
QPRT Alternatives for North Carolina Families
A QPRT is not the only way to plan for a vacation home in North Carolina. Some families use a revocable living trust, which does not save on federal estate taxes but does avoid probate and keeps transfers private.
Another common tool is survivorship titling. Adding “with right of survivorship” to a deed lets property pass automatically to the surviving owner, but it does not protect against estate taxes if the estate is large. This method comes with significant tax risks and exposes the original owner to the beneficiaries creditors in a bankruptcy or divorce.
Some owners consider a Lady Bird deed (enhanced life estate deed). These deeds are used in North Carolina, but there is no statute authorizing them, and title insurance companies vary in whether they will insure them. They can work in some cases, but the lack of legal certainty makes them less reliable than a trust.
Finally, married couples in North Carolina often rely on tenancy by the entirety (TBE). This special form of ownership provides strong creditor protection and transfers into properly structured trusts can preserve that protection.
Each of these approaches has its own pros and cons. For high-value vacation properties where federal estate taxes are a concern, a QPRT may still be the most effective tool.
Answering Key Concerns for QPRTs in North Carolina
Does North Carolina have its own estate or gift tax?
No. Both were repealed years ago. QPRTs here only affect federal estate and gift taxes.
How do interest rates (Section 7520) affect a QPRT?
Higher 7520 rates increase the value of your retained term, which reduces the taxable gift. QPRTs are often more attractive in higher-rate environments.
What if the vacation home has a mortgage?
Principal payments made by the grantor are treated as additional gifts. On the other hand, the Garn–St. Germain Act generally prevents a lender from forcing a homeowner to pay their entire mortgage balance upfront (calling the loan due) if the property is deeded into a trust and the grantor remains a beneficiary and occupant.
Can I rent my vacation home on Airbnb during the trust term?
No. The IRS requires that the home remains a personal residence. Occasional short use is fine, but regular rental activity can void QPRT status.
What if we sell the home or it’s destroyed?
The IRS allows this, but the proceeds must be reinvested in another residence or distributed properly within about two years.
Will my heirs get a step-up in basis?
If you outlive the term, heirs receive your original basis (carryover basis). If you die during the term, the property is pulled back into your estate, and heirs get a step-up.
Do I need to file a gift tax return?
Yes. Transferring a home into a QPRT is a completed gift of the remainder interest. IRS Form 709 is required, and married couples often elect gift-splitting.
Does moving a jointly owned NC beach house into a trust kill tenancy-by-the-entirety creditor protection?
No. North Carolina law lets spouses transfer TBE property into a joint trust or into two separate trusts without losing creditor protection, so long as both spouses remain beneficiaries and are still married. This means the property can keep its shield from the creditors of one spouse even inside a trust.
Do we owe NC deed excise tax to put the house into a trust?
North Carolina charges deed excise tax at $1 per $500 of consideration. But when a property is transferred into a trust with no consideration (such as funding a QPRT) no excise tax is due. Most deeds into trusts in NC are recorded with $0 consideration, but the deed must be prepared and formatted correctly for the county.
Why not just use a Transfer-on-Death deed in NC?
Because North Carolina doesn’t allow them. As of 2025, there is still no statute authorizing TOD deeds for real estate, although proposals have been introduced in the legislature. That’s why most NC property owners use revocable trusts, survivorship deeds, or QPRTs for probate avoidance.
Should You Use a QPRT for Your Vacation Home?
For North Carolina families with high-value beach or mountain homes, a Qualified Personal Residence Trust can be a powerful tool. It reduces exposure to federal estate taxes, avoids probate, and allows the owner to keep using the property during the trust term. But QPRTs also carry risks: they are irrevocable, the grantor must outlive the term, and heirs lose the step-up in basis if the trust succeeds.
In short, a QPRT can protect a growing vacation home from a potential 40% federal estate tax and ensure it passes smoothly to the next generation. The right choice depends on family goals, property value, and timing.
Every family’s situation is different, and the details matter. Schedule a free initial 15-minute consultation to get your questions answered and clarity on the best way forward for your vacation home and estate plan.
