Qualified Personal Residence Trusts

For many people, their primary residence is one of their biggest lifetime investments. It might constitute a large part of their estate and a large part of the inheritance that they intend to pass to their children. Accordingly, many people have two concerns when it comes to their primary residence. They are concerned both with protecting their home for their heirs and with minimizing the tax implications on their residence. A qualified personal residence trust is a relatively new way of being able to achieve these goals.
The Benefits of a Qualified Personal Residence Trust
Qualified Personal Residence Trusts offer many benefits to both the current owners of the home and the heirs who will inherit the home. If a homeowner decides to establish a qualified personal residence trust then he or she will put the home into a trust for the benefit of whomever he or she wants to inherit the property. During the term of the trust, the owner will be able to live in the house rent free so long as he or she continues to pay all the expenses of the home, including the real estate taxes. Thus, the homeowner retains right to live in his or her home and the people who will inherit the home are not burdened with taxes or other expenses at a time when they are not using the home.
How to Establish a Qualified Personal Residence Trust
Since a home is such a large asset, it is important to work with a trusted estate planning attorney when developing your qualified personal residence trust. Each trust should:
  • transfer title of the home into the trust;
  • set a defined period (for example 8 years) during which the creator of the trust may live in the home rent free while paying all expenses;
  • if the creator of the trust wishes to live in the home after the defined period then he or she must pay a fair market rent to the owners of the home.
Since the home is in a trust, the creator of the trust will not need to pay estate taxes on the property. The creator of the trust will, however, need to pay gift tax on the trust assets if the amount of the gift exceeds the amount exempt from gift tax. The value of the home that is subject to gift tax may be considerably less than the fair market value of the home because of the interest that the creator of the trust is maintaining in the home. It is important to note that if the creator of the trust dies while he is still living in the house rent free and before the home passes to the heirs then the value of the home may be included in his estate. 
A qualified personal residence trust provides some very real benefits for families. In order to recognize these benefits, however, it is important to consult with an estate planning attorney when preparing your trust documents to make sure they comply with all applicable laws.

The information on this page is meant to provide a general overview of the law. The laws in your state and/or city may deviate significantly from those described here. If you have specific questions related to your situation you should speak with a local attorney.

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