Depressed housing values and a potentially temporary increase in the gift tax exemption may make this a perfect time to consider giving your house away to your children. I expect that the first reaction many people may have is that they are still using their house and plan to do so for the foreseeable future. Fortunately there is a type of trust that allows you to remain in your home while taking advantage of the $5 million gift tax exemption and the low property values.

A 'qualified personal residence trust' or QPRT can be a powerful tool in as part of a comprehensive estate plan. But like any financial tools it is not appropriate for every situation. It may be of less value to those who are not at risk of going above the estate tax exemption. Also, once the trust expires, ownership of your home will transfer, even if you are still alive.

In order to address what happens if you are still living in your home when the trust expires, many families create agreements which allow the parent the option of renting the home from the child to which the home has now passed. In some situations this can even have the added benefit of allowing for you to pass more of your assets along in the form of rent. Although to be treated properly as rent it must be a fair market value, and your children, as landlords, will still have to pay taxes on the rent as income.

Of course before making any important financial and estate planning decisions it is important to work with an experienced estate planning attorney or financial professional.

Source: Wall Street Journal "A Matter of Trust: Giving Away a Home" Anne Tergesen, March 19, 2011