A qualified personal residence trust is effective when you do not want your home or vacation home considered part of your estate. This helps you to depreciate the value of your estate, therefore helping to lessen the estate taxes your heirs will be hit with. In utilizing this trust, your property will gradually pass to your beneficiaries over a certain period of time. You have the right to live in this house during the term of the trust and even after if you so choose.
The best way to go about this is to talk to your heirs. You need to make sure that this is something that everyone wants. Remember, once you put the house in the trust, you can't take it out. The house doesn't belong to you anymore. So make sure the beneficiaries are real clear on this and that you will still have a place to live after the term of the trust is over. As the term of the trust comes to an end, the house will belong to the beneficiaries.
The advantage of the QPRT is depreciation of value in the eyes of the IRS. The way this works it that you gift your home to the trust. But the value of the gift depreciates every year as the term lingers on according to the discount rate set by the IRS. For example a property that was valued at $500,000 in thirty years it might be worth only $55,000 to you. And if you outlive your trust, you don't have to pay taxes on this $55,000, it can be part of your unified credit, meaning it's not taxable.
At the end of the day the value of the gift to the trust depends on the discount rate set by the IRS, the age of the person setting up the trust, the number of years in the term of the trust, and the value of the house.
You get rid of the house and you pay no estate taxes. The house appreciates in value without the appreciation being added to the value of the house.
You should setup your qualified personal residence trust in such as way as to ensure that you will outlive the term of the trust. This is because the house will remain part of your estate if you die within that term, hence defeating the purpose of the trust. Be sure to seek the counsel of a good lawyer who has experience in setting up these types of trusts. You will need to know how other people have sufficed with these trusts. You may also choose to name this lawyer the trustee of the trust as you will need someone outside of the family to look after it. Make sure that you have secured another residence in which to live when the trust reaches the end of the term. Consideration of such factors will save you hardships in an older age.
Be sure that a personal residence trust is the right thing for you before you proceed to set it up because once you do, the house is technically no longer yours.