Response from Cynthia Jackson, Esq.:

The Qualified Personal Residence Trust is a planning device that can lessen the tax burden of passing residential real estate to the next generation. To employ a QPRT the property owner transfers a primary or second residence to an irrevocable trust. The owner reserves the right to live in the residence for a certain period of time. After that period passes, the property passes to whomever the owner designated in the Trust, usually children or other heirs. If the owner continues to occupy the property after that time period, he must pay rent.

By transferring the residence to an irrevocable trust the owner has made a taxable gift that is applied against the exemption amount. However, the value of the gift is discounted by the value of the time the owner will occupy it instead of being valued at full market value as of the date of death. In this way the owner has transferred a valuable asset at a discount to the heirs who would receive it anyway. The asset has been removed from the owner’s estate and the former owner can still occupy the residence.

Special consideration must be made in choosing the term of possession of the residence. It should be long enough to allow for a substantial discount of the gift but not so long that the owner will not survive the term. Failure of the owner to survive the term will defeat the purpose of the QPRT. Also, the owner must reconcile himself to the idea of giving up his rights to the residence after the term ends. Although he may lease from the new owner there cannot be a preexisting arrangement to that effect.

To implement a QPRT you must pay to draft the document, prepare a 709 Federal Gift Tax Return and obtain a certified appraisal of the property.

For many clients this cost is minor compared to the possibility of saving hundreds of thousands of dollars in estate taxes.