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Qualified Personal Residence Trusts  After TRA 2001, many people will continue to profit by transferring their residence to a special trust called a "qualified personal residence trust." The idea here is to make a gift of one's residence to children that will "kick in" some years -- say 10 -- down the road. This results in a much lower taxable gift to them. In the example below the gift of a $300,000 home in ten years is taxed as if a gift of $124,000 were being made today! This might not seem logical, and, in fact, the government allows this tax loophole to exist because it makes an erroneous assumption. Consider this example:
Obviously, a house worth $300,000 today in normal times would be worth more in ten years, not less. The government, however, assumes that the value of your house will not increase with inflation. It assumes that it will be worth exactly the same amount as it was worth when you placed it in the trust! Thus, your beneficiaries will receive that extra value tax free. With a modest inflation assumption, the home will be worth $450,000. You remove $450,000 from your estate at a tax valuation of $124,000! In the meantime, the client has the right to live in his or her home. If the client wants to remain in the home after the term is up, he or she is free do so, provided rent is paid. Remember, the idea is to get assets out of the client's name. The only drawback is that the client has to survive for the length of the trust -- in our example 10 years. If not, then the house comes back into his or her estate and is taxed at its full value. Back
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