For many families, their primary residence or vacation home is their largest asset, pushing them over the estate tax exemption limit. A Qualified Personal Residence Trust (QPRT) allows you to give the house to your children today, at a steeply discounted value for gift tax purposes, while retaining the legal right to live in it for a set number of years.
The Valuation Discount
When you transfer a home into a QPRT, you retain the right to live there for a term (e.g., 10 years). Because your children cannot use or sell the house for 10 years, the IRS agrees that the 'gift' you are making today is worth significantly less than the home's current market value.
The QPRT Discount
Taxable Gift = Current Home Value - Value of Your Retained Right to Live ThereThe longer the term you choose to live there, the lower the taxable gift value today. Furthermore, all future appreciation of the home occurs outside your taxable estate.
The Rent Requirement
If you survive the term of the QPRT, the house legally belongs to your children. If you want to continue living there, you must pay them fair market rent. While this sounds unappealing, it is actually an excellent way to transfer even more cash to your children estate-tax-free.