Qualified Personal Residence Trust

What is a qualified personal residence trust?

A qual­i­fied per­son­al res­i­dence trust is an irrev­o­ca­ble trust cre­at­ed for the pur­pose of sell­ing a per­son­al res­i­dence to fam­i­ly mem­bers. It can be used to sell a vaca­tion home to a fam­i­ly mem­ber, as well. Say you want to sell your home to your daugh­ter. You could place your home in the trust, along with a lim­it­ed amount of cash to main­tain the house. You would decide how long you want the trust to last-five years, 10 years, whatever-and you could con­tin­ue liv­ing in the prop­er­ty. When the term of the trust expires, own­er­ship of the home would auto­mat­i­cal­ly pass to your daugh­ter. You could con­tin­ue liv­ing there as long as you pay fair mar­ket rent for the prop­er­ty. The attrac­tive­ness of this trust results from the favor­able gift tax val­u­a­tion rules which apply when the trust is first cre­at­ed. When you trans­fer your own­er­ship of the home to the trust, you’re mak­ing an imme­di­ate gift of the val­ue of the “remain­der inter­est ” in the trust-in oth­er words, the future inter­est that will pass to your daugh­ter. Although you’ll have to use the Internal Revenue Service’s actu­ar­i­al tables to deter­mine this val­ue, you can manip­u­late the out­come through a com­bi­na­tion of a favor­able appraisal and prop­er selec­tion of the num­ber of years the trust will last.

Are there cautions that should be heeded when considering a qualified personal residence trust?

While a qual­i­fied per­son­al res­i­dence trust can pro­vide some impor­tant tax and estate plan­ning advan­tages, it also involves some pit­falls. Perhaps the biggest poten­tial tax prob­lem is the way the Internal Revenue Service will val­ue your home if you die before the term of the trust has expired. If that hap­pens, the home will be brought back into your estate at its val­ue on the date of your death. So the tax ben­e­fits you had hoped to reap when you first cre­at­ed the trust will be wiped out.