Transferring Assets in a Safe Manner

We all want the assets we have worked so hard to accumulate to be taken care of when we pass, especially if we want to pass these assets to a special trust. We would like to know that we did everything we could to make sure everything was in order and our trustees would have no problem in obtaining these assets that we were passing along to them, and this is the exact question Matthew Mullhofer’s long time client came into his office with. What technique can an individual have regarding transferring assets to their heirs in a safe manner? A common question that people want to know is how to safely plan for a Personal Residence Trust, which is an important question because family residence is a major asset, so it is not surprising that safely transferring it to a special trust is important. Congress has enacted a legislation that has approved a type of planning that will benefit all parties involved when doing a Personal Residence Trust.

A qualified personal residence trust can easily be approved if there has been a proper evaluation of the residence and if the parents transfer 50% interest in the residence which is allowed by IRS codification. This is helpful when parents want to keep their separate interest in the residence. The IRS limits this planning to two residences so parent(s) can transfer a second home or vacation home under this planning as well. This type of arrangement is usually done between parent and child, so there is not an increase in property taxes at the end of the fixed term.

A qualified personal residence trust (“QPRT”) is a trust that can be used to transfer your residence to your children at a extremely reduced gift tax cost and with no estate tax, and also allows you to continue to live in the residence for as long as you like is known as. You do not have to transfer your entire interest in the family residence. The Law Office of Matthe Mullhofer can help you with this. This is how it works:

Trust for Fixed Term: While you are still living, you can give your asset(residence) to a trustee, which can be yourself(California state law permits this). The trustee must grant the right for you to live in the residence rent-free for a fixed number of years that is stated in the trust instrument, which would most likely be the number of years that you are likely to survive. During this term, you will pay mortgage expense, real estate taxes, insurance, and payments regarding maintenance and repairs(you can deduct mortgage interest and real estate taxes on your income tax return). When the term is over, the asset stays in the trust for them or is given to your children.

Maintenance after Fixed Term: After the fixed term ends, you can keep using the residence in one of two ways. First, instead of immediately dispersing the residence to your children, the residence can be kept in trust for your spouse's lifetime(this is assuming that the residence is available to you). Or, there is another option of creating a lease with your children which will allow you to live in the residence for as long as you wish. However, keep in mind that if you create a lease you must pay market value rent to your children after the fixed term ends so the residence is not being charged estate tax on your death.

If you are still living when the fixed term of the QPRT is over, your estate tax will not include the value of the residence. If you don't live through the fixed term, the estate tax will be affected as if you hadn't created the trust in the first place.

The rules regarding a QPRT can be complex. If you are contemplating setting up a QPRT, feel free to contact Matthew Mullhofer to discuss this matter.