Qualified Personal Residence Trust or QPRT is also known as the personal residence trust. This trust should not be viewed as an asset protection tool. Depending on your age (if you’re over 70) then it is an okay financial tool. However, if you need real asset protection from frivolous lawsuits, eliminate probate and voluntary tax and decreasing the chance of Medicaid spend-down then it’s best to talk to Estate Street Partners® at 1800-938-5872.
A personal Residence Trust or a Qualified Personal Residence Trust is a specialty Trust Agreement used to transfer the personal residence (in an irrevocable manner) out of an Estate Tax position by “gifting” the personal residence thus reducing the future appreciation of the residence from estate taxation. The person gifting the house to the Trust gets to live there rent-free for a specified period of years. If the person gifting the house survives the end of the specified number of termed years, the residence will pass estate tax free to the heirs.
The first tip-off that the guy recommending the Qualified Personal Residence Trust (QPRT) is not well versed in asset protection is the suggestion that the Qualified Personal Residence Trust is an asset protection device (a rip off).
There are problems with a Qualified Personal Residence Trust:
The Grantor (original owner) must give-up their personal residence irrevocably and could end-up paying non-tax-deductible rent to the QRPT which in turn the Qualified Personal Residence Trust (QRPT) will be subject to Trust Taxes at a rate of 35% plus.
If the Grantor dies before the term years the gift is reversed and the total amount is included in the estate for purposes of taxation.
Part of the Unified Estate and Gift Tax Credit will be used when the house is “gifted” to the Trust and elects to use part of their tax credit.
The residence must continue to be used as the Grantor’s personal residence for the specified term of years (exception if the Grantor is institutionalized, i.e. nursing home) otherwise ceases to be a Qualified Personal Residence Trust and the tax benefit is reversed.
Putting a mortgaged property into a Qualified Personal Residence Trust is a bad idea. Part of the mortgage payments is considered additional gifts, thus further eroding the gift tax exemption.
Qualified Personal Residence Trusts are structured as Grantor Trusts and so all income and expenses of the Qualified Personal Residence Trust is taxed to the Grantor.
As an asset protection tool, the Qualified Personal Residence Trust has marginal value. The Qualified Personal Residence Trust is not a bad estate planning tool for clients over the age of 70 to gift away a large asset at a significant discount. The Qualified Personal Residence Trust does not work well with younger people. The basic problem is if the Grantor dies before the stipulated number of years (do you know when you’re going to die?) the tax advantages are reversed. And, if the Grantor outlives the stipulated number of years, the Qualified Personal Residence Trust recognizes taxable rent at the trust tax rates. Estate Street Partners® is not a big fan of the Qualified Personal Residence Trust, since the Qualified Personal Residence Trust “locks-in” the Grantor into an irreversible set of circumstances and variables i.e. naming the number of years the Grantor is going to live. There are better devices.
To learn more about repositioning assets for wealth building, implementation of precise asset protection systems, tax minimization strategies, elimination of the probate process, and elimination of the only voluntary estate tax system, and tax efficient transfers to your next generation contact us toll-free at 1888-938-5872.
This statement is required by IRS regulations (31 CFR Part 10, §10.35): Circular 230 disclaimer: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
What is a land trust? Many people have the misconception that land trusts will give them real estate asset protection in the case of a lawsuit. The following article discusses the myths surrounding land trusts and offers some information that will help individuals understand land trusts.
Asset Protection Myths: Asset Protection and Land Trusts
Last wills and testament with a revocable living trust
Asset protection with land trusts are an area that many do not have enough information about. To clear up some common myths and misconceptions, we will begin by discussing what a land trust is and how it can be used effectively by you.
The overwhelming majority of land trusts we see are revocable living trusts. While a land trust does have some different features in regards to making the owner of the property more difficult to find, the land trust does not protect the asset in any way. As a side note, it is possible, but it is rarely the case, for a land trust to be an irrevocable trust as well which would make it an excellent asset protection tool since the individual would no longer remain the owner of the property, however we rarely see this. The majority of people will choose to use a land trust to retain their property without taking it irrevocably out of their estate.
It is not suggested to try to “hide” their assets in order to protect them. Since 9/11 and the Patriot Act, there is no such thing as secrecy in the United States. There is no legal way for any advisor to claim of doing such a thing. The best way to hide is in plain daylight with a properly drafted irrevocable trust, like the Ultra Trust®, and exchanging the assets into the irrevocable trust to avoid fraudulent conveyance.
Seeing as the topic of asset protection is a main concern for many individuals, discussing various asset protection tools will allow property owners to have choices as well as the information they need to make educated decisions. Unfortunately, many people, as well as advisors will often learn that these land trusts can be asset protection tools and they do not take the time to learn about the details before jumping right in – don’t be one of those people.
Land Trust Disadvantages
As mentioned, land trusts are usually revocable trusts and in all cases, a revocable trust should be avoided when looking for asset protection. To highlight this point, let’s say that Mr. Merker hosts a party at his home in which alcohol is being served. A guest at the party drinks a bit too much and drives home, getting into an accident on the way. Three people in another vehicle were killed. The end result is that the party host will be sued because he was the one serving the alcohol. What happens now? Basically, any assets that are in his name, including assets that are in a revocable trust, yes, including a land trust, will be considered in the lawsuit.
Land Trusts sold to Hide Assets
Those selling these trusts will try to convince people that all real estate should be placed into a land trust. This is done so that if there is a lawsuit in the future, these assets will not be “found” and the land will be protected. This is because the land trust will temporarily hide these assets from creditors. For example, if an individual is in an accident and is being sued for a total of $2,800,000 and had his real estate placed into a land trust, the lawyer for the plaintiff would not be able to locate these assets with a cursory search. In this case, the lawyer may settle for the amount that the insurance will pay and not pursue going after the rest of the individual’s assets, namely because none were found with an initial cursory search, but with one extra step the owner is found fully exposed with no protection.
The Act of Hiding Assets
When using a land trust, the assets in the trust will be hidden temporarily. This is so that if there is a personal injury lawsuit, the lawyer will have a difficult time finding any assets. However, in the case mentioned above, after a little detective work and digging, those assets will be found and will be considered in the lawsuit. In a real type of case example, typically, a lawyer (personal injury one) can file a lawsuit against, say, Mr. Merker, in the case above, and while in the deposition where the oral testimony is given, the truth of any and all assets within a revocable trust or a land trust must be disclosed or a charge of perjury or withholding evidence could turn a civil case into a criminal one.
It may be true that a land trust is better than not having any asset protection at all. However, these trusts should only be used if they are combined with other forms of asset protection, including Family Limited Partnerships or Irrevocable Trusts. Many land trusts are offered to people on the premise that the trust will protect the assets, yet people are unaware that this is seldom the case when the land trust is the only form of asset protection being used.
When there is a lawsuit of any significance, you can be assured that lawyers will dig until they find something. With a land trust, the assets are hidden in the beginning, but they can be located. In the end, the defendant will be required to disclose all assets and these will all be taken into account during the lawsuit. It cannot be stressed enough that there is no legal way to “hide” assets in this manner.
In terms of asset protection, land trusts are not effective. If an individual does choose to take this path, they should make sure their assets will be transferred into a trust that is irrevocable, meaning it is owned by a separate entity.
Please contact us at Estate Street Partners at (888) 938-5872 to find out more about land trusts and how you can protect your assets.
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Advisors and clients doing asset protection and tax planning are urged to avoid any involvement in Distressed Asset Trust transactions. Failure to do so can result in heavy fines. All advisors are being warned that these types of transactions should be avoided and no client should engage in these transactions.
Estate Street Partners wants to take a moment to advise newsletter members and the American people of a concerning topic. This advisory is in regards to transactions and scams or devises that may pose a threat to advisors, their practice, their clients and anyone else. Be aware to avoid any listed IRS transactions, illegitimate transactions or schemes, or asset protection crooked dealings. Estate Street Partners is here to assist advisors and the general public from staying away from these schemes. One such scheme is called the Distressed Asset Trust transaction. If an advisor or client is involved in a Distressed Asset Trust transaction, they could face fines up to $100,000 for natural persons or $200,000 in other cases.
A notice was issued by the IRS, known as Notice 2008-34. This notice is an effort to prevent the transference of any built-in loss that is a result of a tax neutral entity (business or individual) to a taxpayer of the U.S. who has not endured a financial loss. The Distressed Asset Trust transactions is a listed transactions by the IRS and advises tax-paying residents to avoid this scam, otherwise, penalties will be issued.
Before October 23, 2004, the following listed Distressed Asset Trust variations below were incorrectly adopted by the taxpayers who employed partnerships: The American Jobs Creation Act of 2004, Public Law 108-357 (118 Stat. 1418) (AJCA), amended § 704, 734 and 743 which became into effect following October 22, 2004. This was for:
All contributions of built-in loss property to any partnership
For basis adjustment regulations in the situation of a dispersion for which the basis reduction is significant
For basis adjustment regulations in the situation of a relocation of a partnership interest for which the built-in loss is significant.
The amendments to § 704, 734 and 743 states that a built-in loss could be used by the contributing partner only and the basis adjustment rules are enforced in any situation with a significant basis reduction or built-in loss that is significant. Read IRS Notice 2008-34.
The IRS notice is currently issuing warnings stating that employing the Distressed Asset Trust transactions to maneuver the American Job Creation Act is deemed a listed transaction of tax avoidance transactions. Estate Street Partners is also warning all advisors and clients to avoid this type of transaction at all costs.