This comes in handy if you want to gift the house to specific heirs yet continue to live in your residence. You get tax benefits too.
What happens is that you transfer ownership of your home to a living trust. You live in the house for a set period of years (term) or until your passing. Afterwards, the home automatically goes to your heirs.
From a tax perspective the initial transfer to the trust is considered a taxable gift. But remember the value of the gift is based upon a math formula. We calculate the ‘present value’ (PV) of your heirs’ future interest. That number may not reflect the future market value but is what you use for taxes.
Separately, if you pass before the end of the term, the value of the home is included in your estate. If you live past the set period of years, the home goes to your heirs.
Your estate also escapes taxation on any appreciation during the term. Your home also avoids expensive and time consuming probate proceedings. This residence trust is irrevocable so you cannot cancel or undo it. This is how it works when there is a tax benefit.
If you have a vacation or holiday home, it also qualifies for a personal residence trust. You can have two (2) of these trusts.
You can also sell the home during the period of the trust without penalty. However, you must reinvest the sale proceeds to the subsequent purchase for the trust to remain intact.
You, your spouse, or a trusted person can act as the trustee. Smart planning always includes a successor trustee.
Normally you would pay for upkeep and maintenance of the home. This would also include property taxes. These are deductible expenses on your personal tax return. However, you do not pay rent.
You can still live in the house after the ‘term’ has expired. In the trust declaration, give yourself the right (in writing) to lease the home back. You pay fair market value rent to your heirs. What they do with your rent money is up to them. This lease back may sound awkward, but you must stick with the tax rules. Your friendly IRS is very strict about these gifts. Do the lease paperwork and money transactions. You might need to prove it.
The rent you pay is from your estate and taxable income to your heirs. You cannot repurchase the home from the trust after the term expires.
If you have a home that you want passed onto family members, and pushing up against the lifetime estate tax exemption, then personal residence trust might be the right solution for you.