3. A revocable trust
A revocable trust is a legal structure that allows the "grantor" or "trustee" to retain control over their assets during their lifetime, as well as specify exactly how and when their assets pass to their beneficiaries. After the trustee's death, the trust acts as a will substitute and enables the assets to be privately and quickly distributed without going through the time and expense of the probate process. This will allow the trustee full control and use of their home during their lifetime while providing for efficient distribution at their death.
Due to the complexity of trusts and the variation in state-level rules, it is important to work with a professional to set up a trust, which costs money, but may be the only way to help ensure that the trust works effectively. It is also important to remember that it may be necessary to change the titling of your assets for the trust to function as intended.
Finally, a trust may be particularly beneficial for families that own properties in more than one state. Without a trust, an estate may pass through probate in multiple states.
4. A qualified personal residence trust (QPRT)
A QPRT is a way to move a primary or vacation residence out of your estate at a reduced gift tax cost. With a QPRT, the home is transferred to the trust right away, but it allows the original owner to retain the right to live in the home for the duration of the QPRT term. During that time, they are responsible for rent, maintenance, taxes, and other aspects of ownership. The trust has an end date after which ownership of the house is transferred to the beneficiary (generally children or a trust for their benefit) and the original owner no longer has the right to occupy the house (although a lease may be negotiated with the beneficiary).
In order for this strategy to be effective for tax purposes, the original owner must outlive the term of the trust. Otherwise, if they die before the trust terminates, the value of the home is included as part of their taxable estate and could be pulled back into the estate. While a QPRT may be used for a primary residence, it can be challenging for a person to lose the right to occupy their home, or pay rent to do so, and thus QPRTs may often be used for vacation homes.
Two big benefits of a QPRT include the reduced gift tax cost of the transfer (because the owner retains the right to live in the home for a period of time and keeps some of the value of the house), and that the value of the home is frozen for estate tax purposes at the time the trust is created. This means that for estate tax purposes, the value of the home is established at the time it enters the trust—and future price appreciation won't affect the estate's tax bill. For a family facing estate tax issues, this strategy may help to limit taxes in the event that the property value increases over time.
Tip: A property that is subject to a mortgage can be difficult to handle from a gift tax perspective, and therefore it is often suggested that any debt be paid off prior to the transfer to a QPRT.
In next blogpost, we will discuss 2 more options to pass down your home to your children.