I have read that some people title their home to personal residence trusts to save estate taxes and also for protection. How do these trusts work?
Older people sometimes want to protect their home and lower their estate taxes. A Qualified Personal Residence Trust (QPRT) may be their answer. Here, youtransfer your residence to the trust and retain a tenancy for ten years. At the end of the ten years, the title to your residence passes to your beneficiaries. Your objective is to transfer your residence at its lower present value (basis), rather than when youdie and your home has a greater taxable value. The QPRT thus freezes its value and reduces your estate taxes if you have a taxable estate. A QPRT can also lawsuit-protect your home because yourcreditors can only claim yourright to use the property for the remaining term of years (or the rental value for those years). However, your creditor cannot seize the home itself because it would be owned by the trust. Nor can the beneficial remainder interest be claimed by your beneficiaries' creditors if your trust includes spendthrift provisions. At the end of the term, the trustee must distribute the assets (the residence or cash proceeds from its sale) or convert the QPRT assets into an annuity which may be the more desirable alternative, if your state creditor protects annuities. However, if you die within the ten years, the trust ends and title to the property reverts to you.