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Article IV "Qualified Personal Residence Trust."

A qualified principal residence trust (QPRT) is created by transferring a personal residence to an irrevocable trust and retaining the right to live in the residence for a fixed term of years. The tax advantage of a QPRT is that when the residence is transferred, the taxpayer pays gift taxes on a discounted value and the subsequent appreciation is not subject to either gift or estate taxes. The value of the residence is discounted to its present value since your children will not receive the residence until the trust terminates. If the discounted value of the personal residence is less than $1,000,000.00, there would be no federal gift tax to pay because of the application of your unified credit. The discount is based upon the length of the term of the trust and the age of the creator of the trust.

To achieve the benefits of this estate planning tool, you as transferor must survive the term of the trust. If you do, you gifted the residence at a discounted value to your children, the subsequent appreciation is not subject to gift taxes and the residence is not part of your estate. If you die before the trust term ends, then you gained nothing but lost nothing. The full fair market value of the residence at date of death is included in your estate but any used portion of your unified credit is restored and any gift taxes paid are credited against your estate taxes.

Income tax consequence must be considered before creating a QPRT. If someone inherits property upon death, they receive a step up basis which wipes out capital gains. Contrastingly, if someone receives property by gift, their basis is the donor's basis. Other considerations may come into play since you are no longer the owner of the residence after the trust terminates.

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