The tax bill passed by Congress in 1990 eliminated some planning devices, but it left open the "personal residence trust." By this device, a person (or couple) may transfer a personal residence into a trust, and retain the right to use it for a stated number of years. After the period of years has ended, ownership of the residence passes to children (or other beneficiaries).

The major benefit of such a trust is that it "discounts" the taxable amount of the gift to the children. There is not an immediate gift of outright ownership, but rather of the right to own the residence at some future date. This right naturally has a value less than the total value of the residence.

How great are the tax benefits? Let's say a couple transfers a residence worth $300,000 to a trust, for a term of ten years. Again, after the ten years, the residence is to pass to their children. The gift of a "remainder interest" to the children is not valued at $300,000 but rather at about $130,000. If the parents outlive the term of the trust, the entire value of the property, whether $300,000 or $3,000,000 at the time of their death, will escape taxation in their estates. All this is accomplished by making a gift valued at only $130,000.

There are at least two significant drawbacks to the use of a personal residence trust. For one, the tax savings are lost if the person establishing the trust doesn't outlive the term of the trust. The residence then becomes part of his taxable estate and passes on to the children at its full value. Secondly, if he does outlive the term of the trust, he loses control of the residence. His children would then become the owners, and he would have to deal with them if he chose to remain.

If you would like to explore this idea further, please call the attorney with whom you work, or Larry Ghilarducci, Alan Macpherson, Al Falk or Eileen Peterson of our Tacoma office.

P.S. IRS RULING ON EFFECT OF PERSONAL GUARANTEES. A recent IRS ruling has thrown a scare into estate planners. It applies in situations where a parent guarantees or co-signs the debt of a child. The ruling declares (a) that the making of a guarantee may constitute a taxable gift, and (b) that a guarantee, if still in effect at the time of a married guarantor's death, may seriously interfere with the "marital deduction" estate tax benefit. If you feel this ruling may affect you, we encourage you to call us.