Transferring your home to a trust

Trusts are useful when it comes to transferring property without the hassle and expense of probate. One special trust can be helpful in transferring your residence to your children or grandchilden, as well as obtaining a future estate tax savings. This trust is known as a Qualified Personal Residence Trust (QPRT) and its use now is timely because property values are depressed. The advantage of this technique is that you can not only transfer your residence(s) to such a trust, but all of the future appreciation in your property will be out of your taxable estate. Such an advantage is especially advantageous if your estate will be large enough (more than $3.5 million) to be liable for estate taxes.

A QPRT allows the residence owner to transfer the title of his residence to the trust and remain in the home for an extended period of time while still taking advantage of gift and estate tax savings. In this case, the residence owner would be the donor or the trust, and this technique can work for up to two homes: the donor's primary residence and one occasional residence. Naturally, you would have to name a trustee, typically not yourself.

These QPRTs have finite durations that coincide with the length of time the donor may continue living in the home. The term must be set within the trust instrument, for example, a term of 10 years. At the end of the term, the trust terminates and the home passes to the beneficiaries. The donor may remain in the home following termination of the trust as long as he or she agrees to pay the beneficiaries the market rent for a similar property. If the worst happens and the donor dies before the expiry of the QPRT, nothing is really lost because the residence would be included in your estate, just as it will be if you do nothing.

QPRTs avoid estate taxes because the donor no longer owns the home after the transfer to the QPRT, which is an irrevocable trust. Therefore, the real property is not included in the gross estate of the donor, and the home passes to the children free of estate tax.

To give you a flavor for the potential estate tax savings, assume that your residence is now worth $800,000 and that your estate will be large enough to incur estate taxes and that you and your wife are 60. If you establish the QPRT with a 15-year term, the potential estate tax savings will be more than $350,000 - certainly not chicken feed. There are lots of wrinkles with QPRTs that a competent trust attorney can share with you.

Even if your estate will not have to pay any estate taxes, it may still make sense to transfer the title of your residence to a grantor, revocable trust. In so doing, you will ensure that your home will pass to your designated beneficiaries without going through probate. Plus, you will eliminate any challenges to your will, and privacy will be ensured. There are some expenses to both establishing and maintaining a trust, so check with your attorney to see if a residence trust makes sense for you.

Got a financial planning question for Greg? You may e-mail him at Greg29083@gmail.com.

Greg Roberts is a certified financial planner with 35 years of financial and estate planning experience.