The arguments for & against this estate planning decision.
Uncommon, or uncommonly wise? Occasionally, a couple or a family will elect to put their home into a revocable living trust, a charitable remainder trust (CRT) or a qualified personal residence trust (QPRT). There are advantages and disadvantages to doing this.
People make this move for a variety of reasons. They may want to save money on probate and reduce estate taxes. They may want a little more protection against “creditors and predators”. They may be looking for a way to gift real property to their adult children. They may want an orderly transfer of such property to a particular heir, free of interfamilial squabbles. By putting a house into a trust, they may accomplish some or all of these objectives.1,2
If much of your net worth is linked to the value of your home, you may be considering this. As the federal estate tax exemption is higher than it once was, placing your house into a trust may have slightly less merit today than it once did. There are significant potential benefits, however.
Putting your home into a revocable living trust. In this arrangement, the title to your house is transferred to the living trust during your lifetime. Besides being the grantor of the revocable living trust, you may also name yourself trustee and beneficiary. This gives you the power to a) add other real estate to the trust, b) gift or sell the real estate held within it while you are alive, c) unwind the trust and put the real property back in your estate within your lifetime.1,3
At your death, the trust becomes irrevocable. Control of the real property is then transferred to a named successor trustee, presumably one of your adult children.1
A revocable living trust may spare your home from probate and facilitate the transfer of title to your heirs. There may be some estate tax savings, and if you become incapacitated, another trustee can be chosen to manage the trust.1
Putting your home into an irrevocable living trust. The irrevocable variation offers you similar benefits, but the difference here is that you are giving up control – once you transfer real property into an irrevocable trust, it is out of your taxable estate and no longer yours. An independent third party trustee manages the trust on behalf of its beneficiaries. In this case, the transfer of real property is subject to gift tax because it is defined as a gift to the trust beneficiaries. Crummey withdrawal right letters may help in this regard – if they are sent to the beneficiaries, some of the amount of the gift may be shielded from such tax.4
Putting your home into a CRT. A charitable remainder trust is an irrevocable trust that helps an owner of a highly appreciated asset defer capital gains and income taxes and help a qualified charity. You make a gift of the real property to the CRT, which then sells it and arranges recurring income payments to you out of the managed sale proceeds. These payments last either for life or for a 20-year period. After you or your surviving spouse die, the charity receives the remainder of those sale proceeds.4,5
By donating real estate to a charity via a CRT, you accomplish four things: you take the real property out of your taxable estate, you get an income stream, you avoid recognition of capital gains on what is presumably a highly appreciated asset, and you can take an immediate income tax charitable deduction based on a portion of the property’s value.5
At first glance, it may seem like the charity is the “winner” here – not your heirs. To counter that, life insurance policies are frequently used. Trust assets may be used to purchase “cash value” life insurance, so that your heirs may one day receive tax-free insurance proceeds of equivalent or greater value than the donated asset.4,5
Putting your home into a QPRT. Qualified personal residence trusts allow you to gift your home to your children while you retain control of it for the term of the trust (typically 10 years). If your home seems poised to rise in value, the QPRT may lead to major estate and gift tax savings – it helps you transfer the home out of your taxable estate, thereby reducing its size. The value of the gift is the fair market value of the home minus “retained interest” (i.e., your right to keep living in it for X number of years, the value of which is derived from IRS calculations).2,6,7
You have to outlive the term of the QPRT and then either a) move out of your house or b) pay your heirs fair market rent to keep living in it. If that doesn’t happen, the trust will be rendered invalid and when you die, the full market value of your home will be counted in your taxable estate. QPRTs were introduced in 1990, when the federal estate tax exemption was only $600,000. As it is currently above $5 million, some estate planners feel these trusts are less necessary today.2,6,8
A last word. Even simple trusts invite complexity into your financial life. You must weigh whether the cost of trust creation and administration will be worth it. After you pass, the trust has to file tax returns and value assets, and the resulting expenses may compare to the money saved by keeping the home out of probate. A transfer-on-death deed (permitted in some states) or other estate planning tools may help you realize your goals more cheaply.
Citations.
1 – homeguides.sfgate.com/advantages-disadvantages-putting-house-trust-42083.html [8/6/13]
2 – money.cnn.com/magazines/moneymag/money101/lesson21/index6.htm [8/6/13]
3 – nolo.com/legal-encyclopedia/free-books/avoid-probate-book/chapter7-7.html [8/6/13]
4 – homeguides.sfgate.com/tax-advantages-creating-trust-real-estate-82243.html [8/6/13]
5 – bnaibrith.org/charitable-remainder-trust-crt.html [8/6/13]
6 – tinyurl.com/ktl8zlj [7/10/13]
7 – foxbusiness.com/personal-finance/2013/07/26/shielding-your-assets-from-estate-taxes/ [7/26/13]
8 – irs.gov/pub/irs-soi/89-90estxs.pdf [1990]
All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment. This material was prepared by MarketingLibrary.Net Inc., for Mark Lund an independent investment advisor, investor coach and author of The Effective Investor. Mark is located in Salt Lake City and Provo Utah.
