Giving the family home to the kids may not be your idea of prudent estate planning, but in fact, passing the family home or a second home on to the next generation can have definite tax advantages. A Qualified Personal Residence Trust (QPRT) can be used for this purpose.

A QPRT allows the older generation to make a future interest gift to the younger generation of a primary or secondary home at a discounted value for gift and estate tax purposes. Since it is a gift of a future interest, the grantors (Mom and Dad), may retain the right to use the property for a term of years.

Current estate tax laws have increased the amount of one’s estate that can be transferred to a non-spousal heir. The plan of Congress was to eliminate the estate or transfer tax by 2010. However, due to the sunset provision of the law, on January 1, 2011, the estate tax comes back.

Given the fact that the Federal Government is operating in the red it is entirely foreseeable that estate taxes may never go away. After all, the easiest people to tax are those who don’t complain, as is the case with those deceased! Given the fact that Congress will need the money, it makes sense to me to plan that some type of transfer tax will always be with us, justifying the use of a QPRT as an estate-planning tool.

The mechanics of a QPRT are fairly straightforward. The grantor, or maker, of the trust is the owner of the home. The children are typically the beneficiaries of the trust.

The grantor gives the property to the trust. However, the grantor reserves to right to use the property for a set number of years he determines. The right to use and enjoy the property is assigned a value as determined by current IRS valuation tables. This value is subtracted from the current value of the property and the remainder is considered to be the taxable transfer.

At the conclusion of the term, the property is then owned outright by the trust and may be distributed out of trust to the beneficiaries, or remain in the trust as property of the trust.

The trust or the beneficiaries of the trust may sell the property, use it themselves, or even lease it back to the grantors, provided the lease is at fair market value. If they elect to sell the property, their tax basis is the tax basis of the grantor plus any gift taxes paid.