Posted on August 30, 2006 at 17:38:06:
For many families today, the family home represents the largest single asset in the portfolio. As real estate prices escalate, people find themselves in estate brackets they never imagined.
One way to shelter the property from higher estate taxes is to put it into a Qualified Personal Residence Trust. This lets the owners give the property to their children (or whomever) for less than its current valuation and continue to live in it. (the longer the trust term, the better the deal for tax purposes). At the end of the trust, the parents must pay fair-market rent – yet another way to transfer wealth. This works for vacation homes, too.
The downside is that the children inherit the house with the original basis, resulting in higher capital gains when it is sold. If the parent or parents die before the trust term is over, the whole trust exercise is invalidated: they inherit at the current value, but they owe estate taxes on the property at that value.