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Chris Jones: Understanding Qualified Personal Residence Trusts

We are fortunate to live in an area where strong demands for real estate have pushed home prices to unimagined levels. For many of us, home ownership has increased our net worth beyond the exemption amount from federal estate taxes.

Since one of the goals of estate planning is to minimize the costs associated with transferring assets to your beneficiaries, it pays to make transfers in a way that minimize, if not eliminate, transfer taxes such as gift and estate taxes. Personal residence trusts are a valuable tool in achieving that goal by leveraging the value of gifts.

How They Work

The owner of a personal residence creates an irrevocable trust and transfers the residence into the trust. The terms of the trust allow the owner to retain the right to use and enjoy the residence for a fixed period of years. At the conclusion of the term, the residence is transferred to others.

Because the residence is transferred into a trust while the owner retains an interest in the transferred property, a transfer tax is not imposed on the full value of the gifted property. The owner’s right to the use and possession of the residence for a specified term is a retained interest that is separately valued.

Using traditional valuation principles, along with published Internal Revenue Service rates, the value of the retained interest is subtracted from the fair-market value of the residential property, resulting in a gift tax on only the value of the remainder interest. This remainder interest is typically less than half the value of the transferred property.


A properly structured personal residence trust includes:

» The Grantor leverages his credit against estate taxes. He transfers the full value of the residence, valued at the date of transfer, but only bears a gift tax cost equal to the present value of the remainder interest.

» The Grantor keeps control over the residence during the term of the retained interest, and has the use and enjoyment of the residence during such time.

» The trust may be written to permit the Grantor the right to lease the residence from the remainder beneficiaries after the expiration of the designated term. If these beneficiaries are the Grantor’s children, the fair-market rent payments are not considered gifts, which further reduces the Grantor’s taxable estate.

» Once the residence is transferred to a trust, all appreciation will not be taxed to the Grantor (as long as the Grantor outlives the terms of the trust).

A successful personal residence trust combines the advantages of a discounted gift for transfer tax purposes, with the removal of post-transfer appreciation from the Grantor’s estate. The use of this type of trust allows a taxpayer to reduce the size of their taxable estate without spending investment assets or liquid assets that may be needed to support their retirement years.

Since our residence is a large portion of our taxable estate, this type of trust can be a useful way to transfer value without having to pay taxes for much of the value.

Chris Jones is an attorney at Rogers, Sheffield & Campbell LLP, a Santa Barbara law firm. Click here to read previous columns. The opinions expressed are his own. This article is not intended to provide legal advice. For legal advice on any of the information in this post, click here for the form or phone number on the Rogers, Sheffield & Campbell Contact Us page.

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