The Trust Lawyers Blog

I. CHOOSING THE STRATEGY TO USE FOR DIFFERENT TYPES OF PROPERTY

a. Real Property

A qualified personal residence trust ("QPRT") is a technique for gifting residential property at discounted values.  The QPRT is an irrevocable trust, which becomes the legal owner of the home during the trust term.  The grantor would continue to live in the home during the term of the trust, and continue to pay the real estate taxes, mortgage and maintenance expenses; the taxes and interest can be deducted on the grantor's personal income tax return, as it was before.  The grantor must remain personally and contractually bound to the trustee to pay off the mortgage indebtedness in order for the amount of the mortgage to be disregarded for valuation purposes.  At the end of the term, the beneficiaries would legally own the home but the grantor's spouse may have the right to live in the house for his/her lifetime.  At that point, the grantor may also remain living there due to spouse’s life estate.  Should the grantor's spouse predecease, the grantor could remain living in the house as long as fair market rent is paid.  The term of the trust is a period of years, selected by the grantor.  The longer the term, the greater the tax benefits.  However, if the grantor does not outlive the term, any tax benefit of this strategy is lost.

a. Life Estates

            An estate is used to express the nature, duration or extent of an interest in land. A life estate is an estate which is measured by the life of a specified person, by the joint lives of two or more specified persons, of by the last survivor of two or more specified persons.[1] A right to use and occupy is not a life estate.[2]

Advantages of a Life Estate:

1. Right to live in house.
2. Removes remainder interest in the house from Medicaid estate after five (5) years of transfer. 
3. Medicaid will only count the value of the remainder interest on transfer, which is a significantly lower value than if the whole were transferred. 
4. Original owner still maintains full control of property and its management also retains Veterans and STAR tax exemptions.
5. Full value is included in original owner’s estate for tax purposes, but remainderman still receive a full basis step up to fair market value upon death.[3]