As part of estate planning in Lombard, it is frequently useful to consider whether a qualified personal residence trust or QPRT makes sense in a particular situation. QPRTs could have many tax advantages for those with substantial assets. However, it is important to consider the potential drawbacks as well as the management concerns before creating a QPRT because the trust is irrevocable.
When establishing a QPRT, careful consideration needs to be given to the terms of the grantor’s retained interest and qualified personal residence trust in Lombard. In addition, the grantor needs to understand the restrictions attached to that interest. It is wise to discuss the details of grantor retained interest and qualified personal residence trust in Lombard with a knowledgeable attorney before creating a QPRT or taking action with property transferred to a QPRT.
When someone in Lombard establishes a QPRT, they take a residential property which may be the primary home or vacation home and transfer that residence to an irrevocable trust for a specified number of years. At the end of the term, the interest in the property transfers to beneficiaries.
During the term, the grantor retains an interest in the property as well as the right to continue living in the residence. However, the grantor’s interest and rights are subject to limitations. Moreover, once the term expires, the grantor retained interest in the qualified personal residence trust in Lombard ends, and the grantor is not allowed to repurchase the property. In some situations, the grantor would rent the property from the beneficiaries, but such rental arrangements cannot be established in advance or the Internal Revenue Service may view the trust as invalid.
A qualified personal residence trust could result in substantial savings in estate taxes if the trust is set up properly and the circumstances are favorable. First, the establishment of the trust effectively freezes the value of the house for tax purposes so that future appreciation is not counted for estate tax purposes.
Moreover, the gift tax value of the residence is also decreased substantially by the grantor retained interest. Because it is the grantor, rather than the trust or the beneficiaries, who has use of the home for the term of the trust, the perceived value of that ownership is substantially less than the market value of the residence.
Issues involving the grantor retained interest and qualified personal residence trusts in Lombard could be challenging. If the term of the trust is set too long, the grantor may die before the end of the term. When that happens, the residence essentially reverts back into the grantor’s estate, and all tax benefits are lost.
On the other hand, if the grantor outlasts the trust by a substantial period of years, then the grantor would need to consider living arrangements. If the grantor rents the property from the beneficiaries, the amount of rent paid decreases of the value of the grantor’s estate, which could be helpful for estate tax purposes. However, the rent becomes taxable income for the beneficiaries, and those beneficiaries may not want the burden of paying rental property taxes and taking on other tasks associated with ownership of a property where they do not reside.
There are numerous issues to consider regarding the creation and administration of a qualified personal residence trust. If the grantor, trustee, or beneficiaries wish to mortgage or sell the property, the transaction becomes complicated, and the use of the proceeds could be limited. The trust is only allowed to hold the residence and a small amount of money needed to maintain the property, so the trustee would need to keep a close eye on accounting to avoid violating IRS rules.
While a QPRT provides sizeable tax benefits, this type of trust is not right for everyone. An attorney familiar with grantor retained interest and qualified personal residence trust in Lombard could explain the pros and cons in your circumstances.