Because that gift will not take effect until some future date, the value is discounted for gift tax purposes. The settlor can apply the unused portion of his or her exemption from gift and estate taxes. If the settlor is married, or if both spouses are settlors, their combined exemptions can be used. The amount of the discount is determined from actuarial tables published by the Internal Revenue Service. The amount of discount usually increases with the age of the settlor and the length of the trust term.
Some people are uncomfortable with the idea of living in a home owned by their children.
Other people see the rent payments as an opportunity to transfer additional funds to their children. If the settlor dies before the trust term ends, the value of the property at that time will be included in the settlor's gross estate and subject to estate tax. It is important, therefore, for the trust term not to exceed the settlor's life expectancy. The effect is as if the trust had never been created. Most trust agreements provide that the property will revert to the settlor's estate if he or she dies before the trust term ends.