There are numerous kinds of trusts, each with its own specific functions. A Qualified Personal Residence Trust is one type of irrevocable trust designed to hold ownership of your primary or secondary residence. That way, upon your death, the value of the residence will not be included in your taxable estate. A Qualified Personal Residence Trust, if created properly can provide a huge benefit for you and your family.
How the Qualified Personal Residence Trust works
When correctly established, a Qualified Personal Residence Trust allows you to continue using your residence, but only for the retained income period of the trust. When that period ends, ownership of your residence will then be transferred to the named beneficiaries identified in the trust. The IRS is unable to impose estate taxes against your residence while the ownership rights have been transferred to the trust, and out of your personal estate.
The First Step in Creating a Qualified Personal Residence Trust
There are several steps required in creating a Qualified Personal Residence Trust. The first step is to draft the irrevocable trust agreement. To do this, you must first decide who you want to serve as the original and successor trustees. You also need to decide the length of time you will retain the right to live in the residence. This period is referred to as the “retained income period. This particular provision is very important because the provisions of an irrevocable trust cannot be modified.
The Second Step in Creating your Trust
The next step is to actually fund the trust with your residence. This is accomplished by recording the new property deed in the name of the trust. You must obtain an appraisal of the residence property in order to determine its value and establish the fair market value of the property. The transfer of the residence into the Qualified Personal Residence Trust is considered a gift to the ultimate beneficiaries of the trust. So, you are required to report your gifting of the property to the trust to the IRS, and you need the fair market value to do that.
The Final Step to Creating your Qualified Personal Residence Trust
Once the retained income period has ended, ownership of the property must pass to your ultimate beneficiaries. Including the provisions for this transfer is the final step in the process of creating your Qualified Personal Residence Trust. A new deed will be recorded by the trustee in the land records where the residence is located.
How to stay in your home after the trust period ends
If you want to remain in your residence once the retained income period has ended, you can do so if you pay the fair market rent for the home. By paying rent, you are also helping to reduce the value of your taxable estate. Essentially, you can then leave more of your assets to your heirs and beneficiaries without having an effect on your gift tax exclusion amount.
If you have questions regarding Qualified Personal Residence Trust, or any other estate planning needs, please contact the Schomer Law Group either online or by calling us at (301) 337-7696.