Integrating Opportunity Zone Investments and Estate Planning

To incentivize long-term private investment in economically distressed communities, the Opportunity Zone program offers valuable income tax benefits to individuals who invest in Qualified Opportunity Funds (QOFs). Originally designed to expire at the end of 2026, the Opportunity Zone program was modified and made permanent by the One Big Beautiful Bill Act (OBBBA). The new program goes into effect on January 1, 2027.

As a brief overview, under OBBBA, gains from the sale of an asset can be deferred for up to five years if the proceeds are reinvested in a QOF. This is pre-QOF deferred gain. In addition, the appreciation in the subsequent QOF investment will not be taxed if the QOF is held for at least 10 years. This is post-QOF investment gain. You can read more about these changes in our Insight “Opportunity Zones Under the One Big Beautiful Bill Act.”

In this Insight, we’ll answer some frequently asked questions about how to combine those tax benefits with an estate plan and avoid common mistakes that could lead to tax liabilities and liquidity issues.

What happens if you gift QOF interests during your lifetime?

High-net-worth individuals often want to gift assets to family members, outright or in trust, to reduce estate taxes. Unfortunately, a transfer of a QOF by gift, including a transfer incident to divorce, is generally treated as though the QOF investor disposed of the interest. That means the pre-QOF deferred gain must be immediately recognized. Furthermore, the QOF holding period ends the tax-free appreciation of the post-QOF investment gain.

Grantor trusts

The adverse consequences associated with gifting QOFs might suggest they are unsuitable for use in estate tax planning. However, there is an important exception to the general rule.

Irrevocable grantor trusts are trusts that may be considered outside of your estate for estate tax purposes but are still taxable to the trust creator for income tax purposes. The reason to structure a trust in this manner is beyond the scope of this Insight, but grantor trusts are commonly used when creating irrevocable trusts for estate tax planning. The Internal Revenue Service’s Opportunity Zone regulations state that a gift of a QOF to a grantor trust does not trigger recognition of the pre-QOF deferred gain, nor does it terminate the holding period for the purposes of determining whether the post-QOF investment gain is taxable. That means that the use of a grantor trust when gifting QOFs can maintain the desired income tax benefits while also providing estate tax benefits.

What happens to QOF interests at the owner’s death?

A transfer of a QOF interest due to the death of the account holder is deemed a “transfer by reason of death.” Transfers by reason of death do not trigger immediate recognition of the pre-QOF deferred gain. The holding period for the QOF also continues based on the time the decedent held the QOF.

Despite this favorable treatment, there is still an unpleasant post-death income tax consequence. A QOF does not receive a stepped-up basis at the owner’s death. Therefore, the pre-QOF deferred gain remains taxable to the heirs who hold it. In addition, taxes may be owed on the post-QOF investment gain. Fortunately, the decedent’s heirs step into the shoes of the decedent and assume the decedent’s holding period. If the combined holding period of the decedent and the heirs reaches 10 years, the heirs can exclude the post-QOF investment gain from taxation.

Grantor trust status can be terminated in various ways, including the trust grantor’s death. However, a change in grantor trust status due to the death of the owner of a qualifying QOF investment is not considered an inclusion event for income tax purposes.

How certain life events affect QOF holdings

Event	Deferred Gain	Opportunity Zone Holding Period	Step-Up in Basis?	Tax-Free Appreciation After 10 Years?
Lifetime gift to an individual or nongrantor trust	Recognized immediately	Ends	Not applicable	Lost
Gift to a grantor trust	Continues	Continues	No step-up in basis	Still possible after 10 years
Death transfer to heir	Continues (not recognized at death)	Heir continues prior holding period	No step-up in basis	Yes, if total holding is greater than 10 years

What are the practical takeaways?

QOFs can provide significant financial and tax benefits. At the same time, owners of QOFs must be knowledgeable about the estate-planning aspects of their investment. Lifetime gifts to individuals or nongrantor trusts should be avoided. Transfers at death do not result in immediate taxation, but the pre-QOF deferred gain remains taxable. Finally, liquidity issues should be considered due to the difference between the five-year pre-QOF deferral period and the 10-year period required to hold a QOF before avoiding tax on the post-QOF investment gain.

If you have any questions, reach out to your Cerity Partners advisor or request an introduction today.