Understanding Estate Taxes
21. Personal residence trust
A personal residence trust lets you save estate taxes by removing your home and any future appreciation on it from your taxable estate - yet you can keep living there.
When you set up a personal residence trust, you transfer your home to an irrevocable trust. For a specified period of time (often 10 to 15 years), you continue to live in the house just as you do now. After that time, it transfers to your beneficiaries-usually your children.
In effect, you are giving your home to your children today. But because they will not receive it until sometime in the future, the value of this gift is reduced. This uses much less of your federal estate tax exemption than if you had kept the home and any future appreciation in your estate.
If you die before the term of the trust is over, your home will be included in your taxable estate, just as it is now. If you live longer than the term of the trust, you will need to pay rent (at fair market value) if you wish to keep living there.