The Ins and Outs of the Personal Residence Trust

The Ins and Outs of the Personal Residence Trust

New Castle Business Ledger
by Nancy F. Blumberg, CPA, CFP
Simon Master & Sidlow, P.A.

Transferring family wealth has been limited by legislation so that many traditional estate planning techniques are no longer available.However, one of the remaining techniques which involves your personal residence has become increasingly popular.The use of a grant or retained interest trust has the potential to save you substantial estate taxes.

You can transfer your wealth to your children or others and retain the use of your home for a fixed number of years.By using a qualified personal residence trust (QPRT) you can avoid estate and gift taxes on any future appreciation in the value of your home and you can make this transfer as a relatively small taxable gift.The value of your gift is the value of the future interest of your residence.This will depend on the current value of the home, the current interest rates and the number of years you wish to retain your interest in the home.A QPRT can be used for your personal residence as well as a vacation home.

If the transferor survives the term of the trust, the full value of the residence is excluded from his estate.If he dies before the trust ends, the full value of the property is included in the estate and all benefit is void.But, nothing ventured, nothing gained.

Personal residence trusts can be very flexible.The transferor can continue to deduct the real estate taxes and personal residence interest on his tax return during the term of the trust.One can also sell the home and use the tax deferred rollover provisions to buy a new home.The transfer may also qualify for the $125,000 exclusion on a sale for persons age 55 and over.

At the end of the term of the trust the transferor can rent the house at fair market rental from the new owners or they may prefer to purchase the house at fair market value before the trust ends.There should not be any prearranged plan to repurchase the home or the IRS may challenge the trust.

Remember when the residence is transferred to a QPRT, a taxable gift is made. Gift tax returns must be filed. The donor may use part of his/her $600,000 estate and gift tax exclusion to offset the tax.

A QPRT may be the appropriate technique to save you and your heirs estate taxes.If you think it may be useful in your estate plan discuss the qualified personal residence trust with your tax advisor.