As previously discussed, there are five standard forms of trusts. Each type has advantages and disadvantages, which you should discuss with your estate-planning attorney. The third type is as follows:
Qualified personal residence trust: A qualified personal residence trust (QPRT) can remove the value of your home or vacation dwelling from your estate and is particularly useful if your home is likely to appreciate in value.
A QPRT lets you give your home as a gift, most commonly to your children, while you keep control of it for a period that you stipulate, say 10 years. You may continue to live in the home and maintain full control of it during that time. In valuing the gift, the IRS assumes your home is worth less than its present-day value since your children won't take possession of it for several years. (The longer the term of the trust, the less the value of the gift.)
Say you put a $675,000 home in a 10-year QPRT. The value of that gift in 10 years will be assumed to be less, say, $400,000 based on IRS calculations that take into account current interest rates, your life expectancy and other factors. Even if the house appreciates in 10 years, the gift will still be valued at $400,000.
Here's the catch: If you don't outlive the trust, the full market value of your house at the time of your death will be counted in your estate. In order for the trust to be valid, you must outlive it, and then either move out of your home or pay your children fair market rent to continue living there. While that may not seem ideal, the upside is that the rent you pay will reduce your estate further.
Original Source: CNN Money, Money Essentials
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