WHAT IS A QUALIFIED PERSONAL RESIDENCE

TRUST IN NORTH CAROLINA?

You Can Reduce the Taxable Value of Your Home by Placing It Into a Qualified Personal Residence Trust

JOHN POTTER CHARLOTTE NORTH CAROLINA ESTATE PLANNING ATTORNEY

What Is a Qualified Personal Residence Trust in North Carolina? www.potterestateplanning.com 2

There are different types of trusts that are used in the field of estate planning,

and they satisfy varying objectives. Certain trusts are useful for people who are

exposed to the federal estate tax.

One of these trusts is the

qualified personal residence

trust. We will look at the

value of qualified personal

residence trusts in this

paper, but we should

provide some background

information about the

estate tax first.

FEDERAL ESTATE TAX

The estate tax can significantly erode the wealth that you are passing on to your

loved ones if you have enjoyed significant financial success. There is a $5.34

million federal estate tax credit or exclusion in 2014. You could transfer $5.34

million tax-free.

Anything that you want to transfer that exceeds this amount would potentially

be subject to the federal estate tax. The tax carries a maximum rate of 40

percent.

When you are calculating the value of your estate, you must include the value of

your home. If you could somehow remove your home from your taxable estate,

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you would reduce your tax burden.

FEDERAL GIFT TAX

In addition to the federal estate tax, we also have a gift tax on the federal level. If

there was no gift tax, you could simply give gifts to your loved ones while you are

living to avoid the estate tax.

Under the tax code, the gift tax and the

estate tax are unified. The $5.34

million exclusion applies to the value

of your estate along with the tax-free

gifts that you give while you are living

QUALIFIED PERSONAL RESIDENCE TRUSTS

Now that we have laid the groundwork, we can examine qualified personal

residence trusts.

When you create a qualified personal residence trust, you convey your home into

the trust. This is going to remove your home from your estate for tax purposes.

In the trust agreement you name a beneficiary who will assume ownership of the

home after the term of the trust expires. Because you are essentially giving the

home to the beneficiary, you are giving a taxable gift.

What Is a Qualified Personal Residence Trust in North Carolina? www.potterestateplanning.com 4

You do not immediately lose control of

the home when you convey it into the

qualified personal residence trust.

When you are drawing up the trust

agreement, you set a term. During this

interim, you can remain in the home as

usual. You live in the home rent free

throughout the duration of the term.

Getting back to the gift tax responsibility, the taxable value of the gift will be far

less than the actual value of the home on the open market. This is because of the

fact that you will be remaining in the home for a number of years after you

create the trust. You are retaining interest, and the IRS takes this into account.

To explain by way of example, let's say that you want to put your home on the

market, but you want to remain in the home for 15 years. The buyer cannot

assume ownership of the property for 15 years.

Nobody is going to pay full market value for the home under this stipulation.

The IRS recognizes this reality when the taxable value of the home is being

calculated.

Ultimately, the beneficiary will assume ownership of the home, but the tax

liability will be much less than it would have been if you left the home to your

beneficiary in your will. Under those circumstances, the full market value of the

home would have been part of your taxable estate.

The interim during which you will remain in the home is referred to as the

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retained income period. You should carefully consider the ideal duration of the

period. The longer you stay in the home, the more you will save in taxes.

However, there is another side to the coin.

If you pass away before the retained income period expires, the strategy fails.

The home would go back into your taxable estate. As result, when you are setting

the term, you should be conservative with regard to your longevity expectations.

CONCLUSION

The federal estate tax exclusion is $5.34 million in 2014. If you are exposed to

the tax, you must take steps to gain estate tax efficiency.

Your home is probably one of your most valuable assets. You can reduce the

taxable value of your home by placing it into a qualified personal residence trust.

When you create the trust, you can remain in the home for a period of time that

you determine. As a result, you do not have to disrupt your life immediately.

To learn more about living trusts and other wealth preservation tools, schedule a

consultation with a licensed estate planning attorney.

REFERENCES

Internal Revenue Service http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estate-and-Gift-Taxes Journal of Accountancy http://www.journalofaccountancy.com/Issues/2006/Oct/TheAbcsOfQprts.htm

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About the Author

John Potter

John Potter is an Estate Planning and Elder Law attorney in the Ballantyne area of Charlotte, North Carolina. His practice focuses exclusively on two areas: Estate Planning, helping individuals protect their families and preserve their legacies both during their lifetimes and after their deaths, including through Wills and Living Trusts; and Elder Law and special needs planning, assisting individuals in qualifying for Medicaid and other government benefits to offset the costs of long-term care, including nursing home care and other medical expenses.

Experience

After graduating from the University of Virginia School of Law in 2003, Mr. Potter clerked for United States District Judge Jennifer Coffman in Lexington, Kentucky. In 2004, he joined the law firm of Taft, Stettinius & Hollister LLP in Cincinnati, Ohio, where he practiced in the litigation section. His experience with estate and trust litigation left him with the conviction to help clients proactively take control of their affairs both to avoid unnecessary, time-consuming, expensive, and heart-breaking litigation and also to give clients the peace of mind and other benefits that come with proper planning. Mr. Potter practiced estate planning and elder law in the northern Kentucky office of his family’s law firm beginning in 2008. In 2012, Mr. Potter moved to North Carolina and opened the Charlotte office of the Potter Law Firm Office. He is admitted to practice law in North Carolina, Kentucky, and Ohio, and he is accredited by the Department of Veterans Affairs. The Potter Law Firm www.potterestateplanning.com 15720 Brixham Hill Avenue, Suite 300 Charlotte, NC 28277 Phone: (704) 944-3245