The Qualified Personal Residence Trust is more attractive to clients because of the (momentarily) increased lifetime gift tax exemption--from $1 million to $5 million through 2012!
The property passes as a gift within the trust to the ultimate beneficiaries. The QPRT benefits the original homeowner because she stays in the house rent-free. The value of the property decreases according to the duration of the trust term (consult your tax or trust and estates attorney). The longer your QPRT’s duration, the more your client’s gift tax bill is reduced. The best part of all is the potential appreciation of the residence upon the close of the QPRT. The appreciation amount is subtracted from the gifting property owner’s estate!
The major risk consideration of entering into a QPRT? If the gifting property owner predeceases the duration of the QPRT, the property returns to the fully taxable estate.
If the gifting homeowner lives to see the transfer of property to the QPRT beneficiaries, she must agree to pay rent on the property at then-market rates. The new owners of the property must then pay current tax rates on the rental income.
Because the lifetime gift tax exemption was formerly a mere million, the increase of up to $5 million through 2012 makes the use of the QPRT a great idea for many clients, according to tax gurus.