Qualified personal residence trust
irrevocable split interest trusts
Residence trusts in the United States are used to transfer a grantor's residence out of the grantor's estate at a low gift tax value. Once the trust is funded with the grantor's residence, the residence and any future appreciation of the residence are excluded from the grantor's estate, if the grantor survives the term of the trust, as explained below.
Personal residence trusts ("PRTs") are irrevocable split interest trusts. The transfer of the residence to the trust constitutes a completed gift. The split interest character of the trust is as follows: the grantor retains the right to live in the house for a number of years, rent free, and then the remainder beneficiaries of the trust become fully vested in their interest. PRTs are similar by nature to other types of retained interest trusts, like GRITs, GRATs and GRUTs.
Generally, if the grantor retains an interest in the trust, then for estate and gift tax valuation purposes, his retained interest is valued at zero. However, if the retained interest is "qualified" within the meaning of United States Internal Revenue Code ("Code") section 2702(b), its value is determined under Code Section 7520.
The value of the retained interest, as will be explained in more detail below, is important for gift tax purposes. Because the transfer of the residence to the PRT is a completed gift, it is desirable to minimize the value of the gift.
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