The Qualified Personal Residence Trust: Protect Your Home – Take Advantage of the Housing Market

Some professionals are more likely to be sued than others – increased liability is simply inherent in fields like medicine, law, real estate and business.  For individuals working in these and similar occupations, asset protection is an important consideration in estate planning and such planning can be accomplished in a variety of ways, using a number of tools.  One such tool is the Qualified Personal Residence Trust (“QPRT”).  When properly executed, a QPRT comes with two big advantages: asset protection and tax savings.

In the typical QPRT arrangement, a homeowner transfers his principal residence into a trust for a term of years and names children (or a trust for their benefit) as beneficiaries who will own the residence at the culmination of the term.  During the term, the property remains the homeowner’s residence, and the QPRT may hold cash for expenses like mortgage payments and certain improvements.  When the term of years comes to an end, the homeowner may lease the property to himself from the beneficiaries at fair market value.

While not many cases address the issue, a recent New York bankruptcy case fortifies the QPRT as an asset protection technique.  See In re Yerushalmi, 2012 WL 5839938, No. 807-2816-reg (Bankr. E.D.N.Y. Nov. 19, 2012).  In that case, the court held that the property in the debtor’s QPRT was not property of the Bankruptcy Estate subject to the Bankruptcy Estate’s creditors.  Significant to the outcome was the court’s finding that the QPRT was legitimate.  First, it was not established during a period in which the debtor was in debt or reasonably foresaw liability to creditors.  This is crucial in asset protection – conveyances are likely to be considered fraudulent if made when there is a reasonable threat of creditor liability on the horizon.  Second, the debtor did not interact with the property as if he was its outright owner; instead, in his transactions with the QPRT, he generally acted in a manner consistent with his position as Trustee.

In addition to asset protection, the other QPRT advantage involves estate and gift taxes.  If the homeowner outlives the term of years in which she is scheduled to reside on the property, the property will not be included in her estate for tax purposes, instead the homeowner has made a gift to the QPRT when the residence was initially transferred to the QPRT.  The gift of the residence is not valued at its full value.  Instead, the gift of the residence is discounted to reflect the homeowner’s use of the residence during the term.   What this means is that the residence is ultimately transferred to family members at a discounted value.  For example, if the residence is valued at 1,000,000, the gift may only be valued at 500,000.  If the homeowner survives the term, then when the residence transfers to the family members, there is no additional gift, even if the residence is now valued at 1,500,000.  Hence, the appreciation, as well as part of the initial value escapes estate and gift taxation.  This is where homeowners may be able to take advantage current housing market conditions.

QPRTs are a great asset protection and wealth preservation tool, but note the following: the New York case, while instructive, is not binding on our local jurisdictions.  Furthermore, while QPRTs have favorable tax consequences, other strategies may be preferable depending on your overall goals and strategies.  Contact Altman & Associates to learn more about QPRT asset protection and wealth preservation and other estate planning tools!

 -  Gary Altman, Esq. and Coryn Rosenstock

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