You Have Options

Since the Qualified Personal Residence Trust (QPRT) is also an Intentionally Defective Grantor Trust, it is an excellent asset protection tool. To begin today’s posting, I need to provide full disclosure. The QPRT involves both trust and tax planning: so the underlying mechanisms are complex. I want to advise you not to attempt this strategy on your own. But instead, consult your CPA and attorney before transferring your home into a trust.

A QPRT is an irrevocable trust funded by the transfer of a personal residence, a vacation home, or both, to the trust. The homeowner still retains a right to reside in the home for a term of years. The term selected is typically between five and 20 years, although the IRS imposes no minimum or maximum term: the longer the term, the greater the benefits that are available. At the end of the term the homeowner no longer has the right to live in the residence. However, if they desire to continue to live in the home then they may then lease the property from the trust or its beneficiaries, which is typically involves their children.

The residence may be sold during the term of the trust. The trust may provide the trustee the power to sell the residence and within a reasonable period of time (two years) reinvest the proceeds in a new residence.  If the proceeds of the sale of the residence are not reinvested in a new residence, the excess cash may be either distributed outright to the homeowner or may be converted to an income stream.

Since a QPRT is treated as a grantor trust for income tax purposes, the homeowner may continue to take advantage of several of the income tax incentives provided for homeowners. For example, even if the client transfers his or her personal residence to a QPRT, the transferor may still deduct interest paid on a mortgage on the property. Also, the homeowner may qualify for the exclusion of gain up to $250,000 from the sale of a residence owned and used as a personal residence for at least two of the last five years.

There are a several options if the homeowners are a married couple who own a residence jointly. They can put the property in one spouse’s name and then that spouse can create a QPRT. They could create a joint QPRT where they both contribute their halves to one QPRT. Or, my choice, they may create separate QPRTs. Each spouse can transfer a fractional interest in the residence.  This is a one-half undivided interest into each of the separate QPRT(s). Only, in America! You gotta love the tax code.  Be sure to read next week’s blog for more on Intentionally Defective Grantor Trusts.

I will host this month’s CE/CPE Webcast: Diamonds in the Rough – Estate Planning with Intentionally Defective Grantor Trusts (IDGTs) on Friday September 27, 2013 at 1:30PM EST. The presentation is web-based and virtual seating is limited. For more information or to register, please send me an email at hello@ttillery.com.

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