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.