Taking Care of Mom and Dad: QPRTs

The qualified personal residence trust is an irrevocable trust, similar in concept to a GRAT, but with a confusing name. It's a good method of shifting the value of the family home out of an estate, for the purpose of lowering the ultimate estate tax.

In this scenario, the house is placed into a trust for the benefit of the children. The value of this remainder interest is a taxable gift.

As with a GRAT, your parents accept some gift tax now to save more on estate tax later. What they get isn't income, but the right to live in the house for a term of years. If they outlive that term, the value of the house -- plus any appreciation since it was transferred to the trust -- passes to the children with no additional federal estate tax.

As with a GRAT, if your parents do not survive the term of the trust, it has no tax effect.

The QPRT does, however, have two significant drawbacks: First, the children will have received the house by lifetime gift, not inheritance, so there is no step-up in the tax basis of the property. For homes purchased decades ago at a fraction of today's price, this means that tax (at the 20 percent capital gains rate) must be paid on the increase in value -- if the property is ever sold by the children.

Second: A relatively recent tax regulation -- applicable to QPRTs created after May 1996 -- has eliminated the common technique of permitting your parents the right to buy back the residence at the end of the trust term.