Real Estate & Taxes:

Advantages of Personal Residence Trusts

A qualified personal residence trust is effective when your client does not want their home or vacation home considered part of their estate. This helps your client to depreciate the value of their estate, therefore helping to lessen the estate taxes their heirs will be hit with. In utilizing this trust, your client's property will gradually pass to their beneficiaries over a certain period of time. They have the right to live in this house during the term of the trust and even after if your client so chooses.

The best way to go about this is to talk to your client's heirs. Your client needs to make sure that this is something that everyone wants. Remember, once your client puts the house in the trust, they can't take it out. The house doesn't belong to them anymore. So make sure the beneficiaries are real clear on this and that your client will still have a place to live after the term of the trust is over. As the term of the trust comes to an end, the house will belong to the beneficiaries.

The advantage of the QPRT is depreciation of value in the eyes of the IRS. The way this works it that your client gift their home to the trust. But the value of the gift depreciates every year as the term lingers on according to the discount rate set by the IRS. For example a property that was valued at $500,000 in thirty years it might be worth only $55,000 to your client. And if they outlive the duration of their trust, they don't have to pay taxes on this $55,000, it can be part of their unified credit, meaning it's not taxable.

At the end of the day the value of the gift to the trust depends on the discount rate set by the IRS, the age of the person setting up the trust, the number of years in the term of the trust, and the value of the house.

Your client gets rid of the house and they pay no estate taxes. The house appreciates in value without the appreciation being added to the value of the house.

Your client should setup their qualified personal residence trust in such as way as to ensure that they will outlive the term of the trust. This is because the house will remain part of their estate if they die within that term, hence defeating the purpose of the trust. Advise your clients to seek the counsel of a good lawyer who has experience in setting up these types of trusts. They will need to know how other people have sufficed with these trusts. They may also choose to name this lawyer the trustee of the trust, as they will need someone outside of the family to look after it. Make sure that your client has secured another residence in which to live when the trust reaches the end of the term. Consideration of such factors will save your client hardships in an older age.

Be sure that a personal residence trust is the right thing for your client before they proceed to set it up because once they do, the house is technically no longer theirs.