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Category: Qualified Personal Residence Trust

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What Is a Qualified Personal Residence Trust?

What is a Qualified Personal Residence Trust? It takes your personal residence out of your estate, and has some advantages, especially when it comes to taxes. The QPRT is a type of irrevocable trust, so once it is created, it is permanent and cannot be reversed. The QPRT is also a type of grantor trust, meaning that the trust creator or grantor may take advantage of gift tax exemptions for property placed in the trust, explains the article “Qualified Personal Residence Trust (QPRT)” from yahoo! finance.com.

As a grantor, you can live in the home for a period of time, with a retained interest in the property. Once the QPRT term ends, ownership of the property gets transferred to the beneficiaries of the trust.

When you establish a QPRT, you take your personal residence, a primary or secondary home, out of your estate and place it in the trust. While the trust is in place, you and your family may live in the home, and you continue to be responsible for maintaining the property’s upkeep. You also still have to pay property taxes.

Any appreciation that occurs after the transfer takes place is also removed from your estate. Because you retain an interest in the residence, you can reduce the amount of property’s value that is subject to estate and gift taxes from your estate.

However, there is one rule you need to know before setting up the QPRT—you must outlive the term of the trust. If you don’t, the entire value of the residence may be included in your estate, which destroys the key reason for setting up the trust.

This is a complex tool for estate planning, and it isn’t for everyone. A QPRT can be good for creating a financial legacy for beneficiaries, helps your estate avoid taxes after your death and if you are paying rent to trust beneficiaries, creates another path to minimize estate taxes.

On the other hand, a QPRT is irrevocable. Therefore, if your circumstances change, it may not be useful for you but you won’t be able to undo it. If you die before the end of the term, any benefits for gift or estate taxes are lost. If there is a mortgage on the property, mortgage payments might be counted against gift tax exemptions.

Attempting to refinance a home that’s owned by a QPRT is difficult, and in many circumstances, not even possible. You don’t own the home, the trust does. Therefore, the property cannot be used as collateral. Selling a home that is owned by a QPRT is also far more complicated than selling the property if you owned it outright.

An estate planning attorney will analyze your estate and tax situation to determine if a QPRT is a useful tool for you and your family. To learn more about QPRTs and other types of trusts, please read our previous posts.

Reference: yahoo! finance.com (July 29, 2020) “Qualified Personal Residence Trust (QPRT)”

 

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Different Trusts for Different Estate Planning Needs

There are a few things all trusts have in common, explains the article “All trusts are not alike,” from the Times Herald-Record. They all have a “grantor,” the person who creates the trust, a “trustee,” the person who is in charge of the trust, and “beneficiaries,” the people who receive trust income or assets. There are different trusts for different estate planning needs. Here’s an overview of the different types of trusts and how they are used in estate planning.

“Revocable Living Trust” is a trust created while the grantor is still alive, when assets are transferred into the trust. The trustee transfers assets to beneficiaries, when the grantor dies. The trustee does not have to be appointed by the court, so there’s no need for the assets in the trust to go through probate. Living trusts are used to save time and money, when settling estates and to avoid will contests.

A “Medicaid Asset Protection Trust” (MAPT) is an irrevocable trust created during the lifetime of the grantor. It is used to shield assets from the grantor’s nursing home costs but is only effective five years after assets have been placed in the trust. The assets are also shielded from home care costs after assets are in the trust for two and a half years. Assets in the MAPT trust do not go through probate.

The Supplemental or Special Needs Trust (SNT) is used to hold assets for a disabled person who receives means-tested government benefits, like Supplemental Security Income and Medicaid. The trustee is permitted to use the trust assets to benefit the individual but may not give trust assets directly to the individual. The SNT lets the beneficiary have access to assets, without jeopardizing their government benefits.

An “Inheritance Trust” is created by the grantor for a beneficiary and leaves the inheritance in trust for the beneficiary on the death of the trust’s creator. Assets do not go directly to the beneficiary. If the beneficiary dies, the remaining assets in the trust go to the beneficiary’s children, and not to the spouse. This is a means of keeping assets in the bloodline and protected from the beneficiary’s divorces, creditors and lawsuits.

An “Irrevocable Life Insurance Trust” (ILIT) owns life insurance to pay for the grantor’s estate taxes and keeps the value of the life insurance policy out of the grantor’s estate, minimizing estate taxes. As of this writing, the federal estate tax exemption is $11.58 million per person.

A “Pet Trust” holds assets to be used to care for the grantor’s surviving pets. There is a trustee who is charge of the assets, and usually a caretaker is tasked to care for the pets. There are instances where the same person serves as the trustee and the caretaker. When the pets die, remaining trust assets go to named contingent beneficiaries.

A “Testamentary Trust” is created by a will, and assets held in a Testamentary Trust do not avoid probate and do not help to minimize estate taxes.

An estate planning attorney in your area will know which of these trusts will best benefit your situation.

Reference: Times Herald-Record (August 1,2020) “All trusts are not alike”

 

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How to Keep the Family Vacation Home in the Family

If this winter-like weather plus pandemic have left you wondering about how to get started on passing the family vacation home to the family or preparing to sell it in the future, you’ll need to understand how property is transferred. The details are shared in a useful article titled “Exit strategy for keeping the cabin in the family” from The Spokesman Review.

Two options to consider: an outright sale to the adult children or placing the cabin in a qualified personal residence trust. Selling the vacation home and renting it back from the children, is one way that parents can keep it in the family, enjoy it without owning it, and help the children out with rental income.

One thing to bear in mind: the sale of the vacation home will not escape a capital gains tax. It’s likely that the vacation home has appreciated in value, especially if you’ve owned it for a long time. If you have made capital improvements over that time period, you may be able to offset the capital gains.

The actual gain is the difference between the adjusted sales price (that is, the selling price minus selling expenses) and their adjusted basis. What is the adjusted basis? That is the original cost, plus capital improvements. These are the improvements to the property with a useful life of more than one year and that increase the value of the property or extend its life. A new roof, a new deck, a remodeled kitchen or basement or finished basement are examples of what are considered capital improvements. New curtains or furniture are not.

Distinguishing the difference between a capital improvement and a maintenance cost is not always easy. An estate planning attorney can help you clarify this, as you plan for the transfer of the property.

Another way to transfer the property is with the use of a qualified personal residence trust (QPRT). In this situation, the vacation home is considered a second residence, and is placed within the trust for a specific time period. You decide what the amount of time would be and continue to enjoy the vacation home during that time. Typical time periods are ten or fifteen years. If you live beyond the time of the trust, then the vacation home passes to the children and your estate is reduced by the value of the vacation home. If you should die during the term of the trust, the vacation home reverts back to your estate, as if no trust had been set up.

A QPRT works for families who want to reduce the size of their estate and have a property they pass along to the next generation, but the hard part is determining the parent’s life expectancy. The longer the terms of the trust, the more estate taxes are saved. However, if the parents die earlier than anticipated, benefits are minimized.

The question for families considering the sale of their vacation home to the children, is whether the children can afford to maintain the property. One option for the children might be to rent out the property, until they are able to carry it on their own. However, that opens a lot of different issues. They should do so for period of one year at a time, so they receive the tax benefits of rental property, including depreciation.

Talk with a qualified estate planning attorney about what solution works best for your estate plan and your family’s future. There are other means of conveying the property, in addition to the two mentioned above, and every situation is different.

Reference: The Spokesman Review (April 19, 2020) “Exit strategy for keeping the cabin in the family”