The Trust Lawyers Blog

Trusts 101

Posted by Dave DePinto on Mon, Jun 13, 2016


a.Charitable Gifts: Gifts to qualified charities are income tax deductible.  In addition, the charitable component of a split interest trust (one where a portion of the trust has a charitable beneficiary, and another portion has a non-charitable beneficiary) is a reduction of total taxable gifts made during the year.  The deduction is unlimited as long as the gift is made without restrictions on the use of the property donated. Qualified charities include any corporation organized for religious, charitable, scientific, literary or educational purposes.  In addition, a charitable gift to the donor’s own private foundation qualifies for the deduction. 


b. Charitable Remainder Trust: A charitable remainder trust (CRT) is an irrevocable trust (an example of a split interest trust) to which the grantor contributes assets retaining a stream of income for either a term of years or for life, with the remainder passing to charity at the end of the term. The grantor is allowed an income tax deduction for the present value of the remainder interest that passes to charity, and the property contributed is permanently removed from his gross estate. The IRS requires the grantor to take an annual distribution of not less than 5% of the trust’s value.  The present value of the charity's remainder interest must be at least 10% of the trust's original value in order to ensure that the charity will receive some benefit at the end of the term. The duration of the trust may be a term of years not to exceed twenty (20), for the life of the donor, or the life of the donor and his survivor.

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Tags: Estate Law, Revocable Trust, Dynasty Trusts, Estate Planning, Residence Trust, Elder Law, Charitable Remainder Trust, CRAT, CRUT

Benefits and Drawbacks of Life Estates

Posted by Bridget T. Faldetta, Esq on Tue, Jun 12, 2012

A  life estate is a planning tool that is widely used to avoid probate, or help ensure your desired distribution of your real estate after death. However, it also features several significant drawbacks that must be carefully considered.

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Tags: Estate Law, Residence Trust, Life Estates

How to Protect Your Home with a Residence Trust

Posted by Dave DePinto on Tue, Jan 31, 2012

Everyone wants to protect their home. We put up fences, purchase homeowners insurance, lock the doors, install security systems, cameras, gates and maybe even hire individuals to keep it safe and sound.  After all, it's the place where the best of life occurs, and most of us want to make sure it will still be there to pass on to our children when we are ill or gone.

However, many do not consider protection of their home against the possibilities of financial loss from lawsuits, illness or taxes.  A long-term illness can force you to promise it away in a Medicaid lien in exchange for skilled health care.  If you die, there can be punishing estate taxes levied against the value.   A home needs financial protection to stand alongside its physical protection, and one of the most effective ways of doing this is through a trust.

A residence trust is a form of asset protection that allows you to place your house in trust as a gift for a future beneficiary, usually your heirs. There are two main types of residence trusts: one for estate tax minimization and asset protection against lawsuits; and the other is a homestead trust designed to protect the home against the costs of long term care.  The focus of this article is for tax savings and protection from lawsuits.

The qualified personal residence trust removes the house from your taxable estate after a term of years chosen by you, while still allowing you to currently enjoy income tax deductions from it, and also may help protect it from legal actions and claims against you.  The remarkable part is that even though the house is titled to a trust, you still get to live there and your day-to-day life is effectively unchanged. After a fixed term of years is over, your rights in the trust terminate and you can then have an exclusive lease to continue to live in the property.  This can be a blessing in disguise, as those rent payments could be used to pay the carrying costs of the home, or be seen as another way of transferring wealth to your heirs while bypassing estate taxes. When the trust term ends it can stay in further trust and, at your death, the home passes on to the beneficiary free of estate tax. This type of residence trust allows you to help guarantee your heirs inherit your house intact, while greatly reducing or eliminating the estate tax burden.

This is not a “too good to be true” deal, and there are several important issues with it that you should keep in mind.

First, when the residence trust is set up, you specify the number of years your home remains in trust before it passes on to the beneficiary. The longer the term of the trust, the lower its overall gift tax burden based on interest rates and IRS actuarial tables. The problem is something of a gamble – if you die before the end of the trust term you choose, the house is taxable on death and all estate tax benefits are lost. However, you are in no worse a position from an estate tax perspective than you were had you not done the trust at all, other than the cost of setting it up.  Health, genetics and longevity are all to be considered when choosing a term.

Another issue to consider is that, while it is in trust, it can be difficult to finance your home. While all Qualified Personal Residence Trusts (QPRTs) allow for sale of the home and even a repurchase of a new one, it is still more difficult to refinance or obtain a mortgage loan than if you owned it outright.  A house with an existing mortgage or equity line of credit may be transferred to a trust provided certain formalities are met.

None the less, even with these caveats, the qualified personal residence trust is still a reliable choice for tax savings and asset protection, especially in today's depressed housing market. Since the tax calculations in setting up the trust are based on its current market value, low housing values can turn into additional tax savings down the line when the home eventually recovers and appreciates outside the hands of the government.

In the end, a residence trust is best suited for those who do not wish to borrow against the home, are in relatively good health, have assets in excess of $1mm and are most concerned with preserving their home for future generations while protecting it from possible legal threats today.

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Tags: Estate Law, Residence Trust, Asset Protection