The cons of qualified personal residence trusts
Transferring your home into a qualified personal residence trust (QPRT) provides the opportunity to remove your personal residence from your taxable estate. It allows you to gift the property at today’s market value to the beneficiaries of the trust, while giving you the right to use the residence for the retained income period of the QPRT.
The benefits are that your beneficiaries will not have to pay federal estate taxes on the property, and you leverage the lifetime gift tax exemption. Before you take this action, however, it’s important to fully understand the potential problems with using this type of trust. Qualified personal residence trusts are irrevocable. That means that, once you make the transfer, you can’t change your mind. If you’re not comfortable relinquishing control over such a large asset during your lifetime, you may want to consider a different type of trust for your property.
The problems you could face
There are several negatives to consider before making the decision to place your home in a QPRT. The first issue is longevity. Qualified personal residence trusts require you to designate a retained income period. If you are still living in your home when that period expires, you will be required to pay rent at market rate to your beneficiaries. On the other hand, should your death occur during the term, the QPRT is rendered useless. Estate taxes will be assessed as though it never existed.
Another of the qualified personal trusts downsides is that it passes your house to your heirs at the tax basis of the original purchase. Say you bought the house for $100,000 and sold it several decades later for $500,000. The carry-over basis for purposes of the trust would only be $100,000. This runs counter-intuitive to the intent, which is to protect the full value of your home from estate taxes.
Finally, if there is a chance you’re thinking of borrowing against your home in the future, keep in mind that banks are less likely to loan money to an irrevocable trust than they are to an individual owner.
We’re all looking to help our children or heirs by protecting the assets they will inherit from us. With a living trust, you can take advantage of the positives of doing so without all of the concerns associated with a QPRT. Living trusts avoid the costly and time consuming probate process, are revocable, and can be altered to fit the changing circumstances in your life as they occur.
Still not sure what direction to take? Call California living trust attorney, David Foley, and his associates at California Living Trusts. They can put you on the right path to securing the future.Schedule your Consultation