Many people desire to pass down their personal home for the benefit of their children after their death. Yet when you take a true accounting of the taxes and other costs your loved ones may face, it’s often becomes clear that your heirs stand to inherit much less than you probably hoped.
That’s why many of estate planning clients in are interested to know how they can protect their assets from “death taxes” and other costs their heirs may face after their passing. One tool often suggested is a qualified personal residence trust.
By using a QPRT, an individual basically places a residence into a trust for his or her children but is still able to live there without paying rent for a certain number of years. The children become the actual owners of the property, but parents are still able to use it as if it were theirs.
Why would an estate planning attorney suggest this? Well, the benefit is when the parent passes away, the property is not considered a part of the taxable estate. This has a significant impact on the amount of estate and gift taxes which will be owed at that time. For example, because the home isn’t part of the estate, there is no estate tax to pay on it. Likewise, the gift tax is also lessened because the property is considered to be worth less than market value since there is a stipulation that the parents can continue to live there.
While the property is owned by the trust, the parents still retain responsibility for any expenses and upkeep, which also includes real estate taxes. If they choose to make any improvements to the property, this is also their financial responsibility and is considered to be a gift to the trust. If the term of the trust comes to an end, the parents may then need to start paying a fair market rate for rent.
There are some downsides to a qualified personal residence trust, however. If the parent were to die before the term was up, the property will be included in the taxable estate at the fair market value. Additionally, if the property has appreciated considerably in value, the children will face increased capital gains taxes when they choose to sell it.
Using this tool, it’s possible to decrease the taxes paid on your estate while increasing what you are actually able to pass on to your children. The trust can extend beyond one personal residence, as well, to include one vacation home. Your Minnesota estate planning attorney can work with you to determine if your situation is a good fit for the use of a qualified personal residence trust.
