Personal Residence Trusts

PERSONAL RESIDENCE TRUSTS AND QUALIFIED RESIDENCE TRUSTS (QPRT)

 

Personal Residence Trusts

No possession is more crucial to protect from a lender’s claim than the home you live in. For a lot of people, the home represents the largest part of their personal wealth. It can also have great sentimental value.

The personal residence trust is one of the most commonly used ways to safeguard a home. This is a very cost-effective structure to implement, it is very straightforward as well as being extremely effective. You tend to find that asset protection lawyers use this form of trust on a regular basis for their clients. That is because they know they provide the security that the clients need. So, how do these personal residency trusts work?

A personal residence trust is an irrevocable trust. The word "irrevocable" can come across as being very intimidating to the majority of people. Because, nobody wants to get involved with anything that is irrevocable, especially if it is going to involve the house that they live in.

The good news is, irrevocable means that no one person (like a lender or a plaintiff) would be able to influence you to withdraw the trust fund. If the trust fund is drafted correctly, you can have the right to revoke it. For example, California law allows the beneficiary and the trustee of a trust the ability to revoke a trust just by signing a basic document. Also, a trust protector can be appointed, and they will also have the right to revoke the trust, change the trust document, and if need be, change the trustee.

Due to the fact that the trust is irrevocable, the possessions that are in the trust are not legally owned by you. Technically speaking the trust now owns your home. Therefore, as you do not own the title to your home, a lender cannot take it from you. Your legal connection to your home is the same as your legal connection to any major building in California (e.g. The Getty Centre in Los Angeles). It is not your asset and as such, no one can connect it to you.

The personal residence trust allows you to live in your home for the rest of your life. As you no longer own the property you must pay rent to live there. You must ensure that your children and other members of your family are named as beneficiaries on your death. This form of agreement is also like a living trust.

Transferring the property into a personal residence trust doesn’t incur any income tax liability. Also, there is no need to pay any property tax or even any reassessment of property tax. A federal statute prevents your bank from doing anything with your mortgage if the ownership of the house is transferred to a personal residence trust. 

As you are appointing another person as the trustee of the personal residence trust you will still maintain the ability to sell or refinance the property. Any specific requirements you feel you need to have built into the trust can be accommodated for.

Once the trust is set up there is no need for any annual fees or filing registration procedures.

A personal residence trust is a cost-effective way of ensuring that you can live in your own home and preserve control over the property. The beauty of setting up this type of trust is that you have the reassurance that irrespective of what happens your home cannot be taken from you by any creditor. The benefits of a personal residence trust make them a favorite technique for most asset protection practitioners.

You will have to decide who you are going to appoint as the trustee or guardian of your trust fund. You or your wife/partner cannot be the trustee. It has to be someone that you can totally trust and have faith in to comply with your wishes.

 

Qualified Personal Residence Trust (QPRT)

A qualified personal residence trust (QPRT) is a particular type of trust that enables its creator to remove a personal residence from their estate in an attempt to reduce their gift tax liability when they transfer assets to a beneficiary.

Qualified Personal Residence Trusts permit the proprietor of the home to continue to reside in the home for a specific amount of time with "retained interest" in the house; but as soon as that period is over, what interest is remaining is classed as "remainder interest", and as such is transferred to the beneficiaries of the trust.

The property value during the “retained interest” period and the length of the trust depend on the Applicable Federal Rates proved by the Internal Revenue Service (IRS). As the owner only retains a portion of the value means the property will fall below the fair market value and as such will incur a lower gift tax rating. Plus, unified credit will also lower the gift tax liability.

If a qualified personal residence trust (QPRT) expires before the death of the grantor, then the house can be included in the deceased estate, and as such, could be taxed.

The risk depends on establishing the length of the trust agreement, combined with the possibility that the grantor will die before the trust expires. In theory, a longer-term trust can benefit from a smaller amount of remainder interest given to the beneficiaries, which subsequently decreases the gift tax; however, this is only beneficial to younger trust holders who could live well past the end date of the trust.

A qualified personal residence trust is not the only qualified trust available. There is a bare trust and a charitable remainder trust. In a bare trust, the recipient has the absolute right to the trust’s assets (both financial and non-financial, such as property and antiques), and the income generated from the assets (such as rental income from properties or bond interest).

In a charitable remainder trust, a benefactor might offer an income interest to a non-charitable recipient with the rest of the trust going to a charitable organization. The charitable remainder annuity trust (CRAT) and charitable remainder unitrust (CRUT) are two types of charitable remainder trusts.

In each of these trusts, the benefactor gets an income tax deduction from the present value of the remainder interest.

Who will you appoint as the trustee or the protector of your trust?  It should not be you or your spouse.  It should be someone you trust.