A qualified personal residence trust is a form of trust and maybe very complex that needs to be explained piecemeal. This article will endeavor to explain as simple as possible the concept of a qualified personal residence trust.

Qualified Personal Residence Trust: Residence Trust Defined

It is a form of transfer of possession and ownership of the grantors residence to another. The tax consequence for the transfer is a gift tax. The reason why residence trust is used is to take advantage of the minimum amount of tax required for the transfer. In addition the residence as well as the future appreciation is removed or excluded from taxation even if it still technically constitutes part of the grantors estate.

Qualified Personal Residence Trust: Personal Residence Trust

This type of residence trust constitutes an irrevocable act by the grantor/trustor to the grantee/trustee. Why, because it already constitutes a binding and complete act of giving a “gift”. In most cases the arrangement allows the grantor/trustor to live in the residence while he or she is still alive but upon death the grantee gets possession. Stated otherwise the trustee/grantee only gets ownership from the time the trust relationship is completed but possession is only given after the death of the trustor/grantor

Qualified Personal Residence Trust: Qualified

The term qualified means subject to a condition. This means that the ownership and subsequent possession will only be granted to the grantee provided he or she meets a certain condition. If the condition is not me then ownership and possession is not complete. For example, Mr. A requires the grantee to finish college before both ownership and possession is completely transferred to the grantee.

Qualified Personal Residence Trust: Object of the Trust

There are limits, provided for by law to the number and type of residence that can be subjected to a qualified personal trust. The number of trusts given to one person must not exceed two and the object must be:

1. principal residence
2. other residence (secondary, third, fourth, etc.)
3. an undivided interest in any of the two

Qualified Personal Residence Trust: Subject of the Trust

The subject matter is the person to whom the trust is granted. In general the grantor can give in trust to anyone. There are known exceptions of course. One exception is if the grantor is specifically disallowed by law to be the grantee of a trust by the trustor.

Qualified Personal Residence Trust: Tax Consequence

The rule when it comes to ordinary trust is that the trustor still retains an interest in the property but under the law the rate should be placed at zero. However this rule is qualified in case of qualified personal trust in that valuation can only be avoided if:

1. Income is annually or regularly given to the grantor
2. Distribution of the principal is only given to the grantor
3. Only 1 residence (personal residence) can be held in trust
4. If the trust earns income more than is allowed it shall be distributed quarterly
5. The residence must remain a persona l residence otherwise the relationship is terminated