Overview of a Qualified Personal Residence Trust

A qualified personal residence trust is an estate planning tool that is used to convey a personal piece of real estate to a beneficiary. With this tool, an individual can pass a piece of property to a spouse, child or charity. Here are a few things to consider about the qualified personal residence trust and how it works.

Qualified Personal Residence Trust

The qualified personal residence trust is a type of trust that was originally created in the 90s. The main objective of this trust is to eliminate estate taxes that could be generated when passing on a piece of real estate. For example, if an individual passed a house to a beneficiary without this type of trust, the beneficiary may have to come up with estate taxes that they do not have. When this happens, the beneficiary might have to sell the house just to come up with enough money to pay for the estate taxes on the gift. By using a qualified personal residence trust, this problem can be avoided.

With this scenario, a grantor will set up the trust and transfer ownership of a primary residence into the trust. The trust will then become the official owner of the piece of property. After a certain amount of time, the property will then be given to the beneficiary of the trust.

Value

One thing that makes this trust unique is that the value of the gift to the beneficiary is not based on the value of the house itself. The value of the gift is based on the future value of owning a house, in present dollars. For example, the trust could be set up to say that it is based on in today's dollars how much the right to own the house in 20 years from now is. This can make the value of the gift much less than the actual value of the house. Sometimes, it will be as low as 25 percent or less of the value of the property. This can get well below the estate tax exemption and make it to where the beneficiary does not have to pay estate taxes on the transfer of the property.

Living in the Property

One of the benefits of using this type of trust is that you can still live in the property, even after you put it into the ownership of the trust. When you set up the trust, you can specify a certain amount of years that you want to be able to live in the property. During that time, you do not have to pay rent to the trust. You simply have to make sure that maintenance is taken care of on the property. If you live in the house for a longer period of time than you previously specified, you will have to pay market rent for the house, for the remainder of your time in it.

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