How to give your home to your children and reduce taxes

Parents can give their homes to their children at a substantial tax savings by way of a trust know as a “qualified personal resident trust” (QPRT).  In creating a QPRT, parents put their home or vacation home in a trust to give it as a delayed gift (usually to their children) while retaining the right to live in the home for a number of years.  QPRTs are seen as ideal for keeping a home in a family for generations. 

Essentially, the way a QPRT works is that the value of the home is discounted to an amount reflecting the delay in time before someone else can live in the home.  The tax is applied to the discounted value.  Further, if the house appreciates in value over that time, all that appreciation will go to the children tax-free.

The only hitch is if the parents die before the trust period is over.  If they do, the house goes back into their estate.  The tax benefits are lost – but on the other hand, there’s no penalty.

It’s important that parents realize that at the end of the trust term, they must pay rent to their children if they want to continue living in the home.  Also, if the house is sold before the end of the trust term, the parents either have to buy another house or convert the sale assets to a Grantor Retained Annuity Trust (GRAT).

A GRAT is created by transferring assets to an irrevocable trust for the benefit of one or more non-charitable beneficiaries.  The person transferring the assets retains an annuity interest for a period of years.

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