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Estate Planning

Give the Kids Your House

How to hand over your house while you're still in it.

If you intend to give your house to your kids and you want to save on estate taxes, consider establishing a qualified personal residence trust, or QPRT. You transfer title of your primary residence or vacation home into the trust. During the term of the trust, you can live in the house.

When the trust term ends, your children become owners, and much of the house's value is removed from your estate. If your home's value grows during the trust period, you get the appreciation of the property out of your estate. If you die before the term ends, the house returns to your estate.

Homeowners should decide in advance whether they will want to stay in the house when the term expires. "Once the term is up, they don't own the house," says Seth Pearson, founder of Pearson Financial Services, in Dennis, Mass. "They have to rely on the kids to let them live there."

So commit to a QPRT only if you have a good relationship with your children. You must pay fair-market rent to your children if you continue to use the property. Otherwise, the IRS could argue that it wasn't a gift at all and you still own the property.

If you sell your house during the trust's term, you retain the right to exclude up to $250,000 of profit from the capital-gains tax ($500,000 for married couples) as long as the house is your primary residence and you have lived there for at least two of the last five years before the sale.