Avoid Estate Taxes On Your Home With This Trust

Harry Barth: Well, okay, well good morning everybody. it’s it’s Harry and Paul and here we are again and next edition of I guess uh Barth Calderon University. 

Paul: Yeah! and Wealth Protector TV thanks everybody for joining.  Harry, I know you’re going to jump into qualified personal residence trust, what’s going on there? 

Harry Bart: Yeah, so I want to talk a little bit about this, this estate planning technique and tool, I think it’s a really important tool and I would like to share some of the details with everybody so you can all have a working knowledge. I want everyone to understand that this is an express part of the internal revenue code. This is not, you know not on the fringe. This is right in the code and it’s basically designed as a tool to help us pass our primary and, or one other secondary residence vacation home, second residence to the next generation without the inclusion of the house or the second residence in our estate for federal estate tax purposes. That could be a lot, you know especially in California and other states that you know you have a four or five-million-dollar home. The price to pass that home to the children could be two million dollars just of transfer taxes alone, just on that property, so this tool and technique was designed to help make that transition a little easier.

Paul: And not for commercial property or rental property?

Harry Barth: Only for a primary residence and one secondary residency. You could have one residence and one personal residence trust another residence in a second personal residence trusts no more than two residents trust. And that’s it, that must be a primary residence. should it cease to be a primary residence, then the qualified personal residence trust is over. So here’s how it works, so basically, I’ll describe it in terms and related to my family, so everyone can understand it. So Harry and my wife Tess we create this personal residence trust,

Harry and Tess can be the trustees of this trust and we make a gift of our home to this trust and reserve a period of time that we will live in this house rent-free, could be my choice 10 years, 12 years, 15 years, 20 years, 25 years and at the end of that time, that we have selected assuming that we are alive, we have to outlive the term that we’ve selected, the house that I put into this trust will then pass to my children or a trust for my children completely income tax and estate tax free.

Paul: Can you change the time period or is it set once you put it in there?

Harry Barth: Once you put it in, it’s set. 

Paul: Okay.

Harry Barth: So, but we choose the time period up front, and understand that it’s interesting because we, when we put make a gift of our home to this trust, we have to have our home valued so we have a present value of the home. If there’s no mortgage, it’s the full fair market value if there’s a mortgage it’s the net equity in the home and we have to have an independent evaluation so, we get it done and then we make this gift now the longer in distance, it is until it transitions to my children, the less of my current federal gift tax exemption I will use up because a gift to my kids 25 years from now is worth less than the gift of my kids in three or four years from now.

Paul: Right!

Harry Barth: So that’s, that’s kind of baked in and calculated in, into the way in which it is constructed. So very important, so let’s say for example you have someone age 70 years old and we set up a 15 year qualified personal residence trust house worth a million dollars we make a gift in. Probably, the amount of the gift is more like $800,000 dollars because the gift won’t happen until. For example, the 15th year from now and all of the appreciation on my home, I mean those and homes are pretty good appreciating assets right, will does not count and will completely escape estate taxation. So I may use up $850,000 dollars of my gift tax exemption today and I may be able to get if my house appreciates a two and a half or three-million-dollar asset to my children, without any tax and that’s worth about a million two hundred thousand dollars. and we have to understand that today, that we have a confluence of two different things, we have an appreciating asset hopefully our homes. And then,  if we have liability or mortgages against them we have amortization of a mortgage debt so the amount of equity is growing, and a very distinct possibility in a couple years of the federal estate tax exemption being cut in half and reduced significantly so while today we might have the room for the growth of our house not being included in our state that might not necessarily be true after December 31st 2025. 

Paul: What if you die before the period, Harry?

Harry Barth: I’m going to get to all of that promise so, so what happens here is let’s first understand during the cupid period or the 15 years or the 20 years the 25 years that we reserve we. We live in the property and we don’t have to pay any rent to anybody this is what we could it’s called the grantor trust so we still get whatever property tax deductions whatever interest deductions that we’re entitled to under federal and state law still accrued to us along the way so we don’t necessarily feel very much different. if we successfully outlive the term of the trust, so if we live past the 15th year then that property at its full value whatever it is at that point I said will transition to my children income taxes stay tax-free. Of course we’re always worried at that point what about the kids all right, what about the kids spouses the kid’s liabilities the kids beds businesses so when it transitions to the children we usually transition it into a trust for the children now owns the home so that home becomes an asset protected asset for our children and so, the children’s liabilities children’s marital status and other children type issues that asset is not available to satisfy those claims because of the way in which we’ve constructed it. and also due to a very unique aspect of this law. My wife and I reserve the right to rent that property from the trust that I’ve created for my children for as long as we wish as long as we live. 

Paul: So you’re not kicked out, the kids are not kicked out?

Harry Barth: They’re unable legally to kick us out, and you know it may sound counterintuitive but the ability to pay that rent allows us to once again, lower our estate and transfer more money to our children estate tax, free in getting it done. So, that’s it, I want to revert back to your question and your question is what happens if we die?  Before the completion of the cuprit term well in most cases almost 98 percent of cases we have what is known as a Reversion. So, in a reversion the house will then revert back into my estate as if I never had the cupro at all. So, basically the house is now that three million dollar house two and a half million dollar house is now back in my estate and I will pay estate taxes on it, I didn’t make it,  we never got it to the point where it was able to transition to the children, but no harm no foul right I used up $850,000 of my exemption to get it in and we passed before effectively making the transition to my children, we’ll get the $850 thousand dollars back. So, it’s the same as if is in other words, no matter what you do you win because there is no downside in creating a qualified personal residence trust. So, there are a couple of issues that we need to talk about so that that’s what happens if somebody dies along the way. Another question that we get is what happens if we want to sell a property? No problem, the qualified personal residence trust would sell the property be the seller and we would then receive the proceeds of the sale and then we have two years from the time that nothing to do with the income tax that may be due on the sale. But, we have two years from the time that we make the sale to make the acquisition of another residence within the cupola so if I have a 15-year coup and at the end of the fifth year my wife and I sell the property and buy another property so basically the cupric sold the property and the cup report the new property and it just continues on into until the 15th year if there’s excess cash, that cash must be returned to me. I can’t keep excess cash in the cupola. I keep six months’ expenses in the cuport and that’s it.

Paul: So get this cash above the value of the home?

Harry Barth: Yeah so, if my house is uh two and a half million dollars I sell the cuport sells it for two and a half million and buys a new residence for two Million I have five hundred thousand dollars of extra cash that $500,000 dollars of extra cash needs to be returned to me. Or, if I don’t buy a replacement residence the full two and a half million dollars is returned to me.

Paul: Outside of the cuport no longer?

Harry Barth: Cuport no longer exists because there’s no longer a qualified personal residence inside the cuport there has to be a qualified personal residence but we do have the means people are not locked into any particular location whatsoever very nice uh trust. And I think when structured properly it becomes a very good tool for asset protection of our home, because what we own at this point is no longer the home we own the right to live there rent free for the cuport term for the 20 years but we don’t own the home anymore the home has been transferred to Trust. So it provides I think a modicum of asset protection um if somebody if god forbid I have an automobile accident or a professional liability my home is owned by the trust and not owned by me and upon its transition to transition to the trust for my children.

Paul: Harry, what if you get a long-term illness and parents need to move out of the house into an assisted living facility what happens?

Harry: Well, it doesn’t matter as long as the home is still a residence all right, it could remain inside the qualified personal residence trust. It is as if you convert the residence to a rental property then the qualified personal residence trust ceases at that time we would move the home into an appropriately designed limited liability company for commercial type asset protection for the asset.

Paul: Got it! 

Harry Barth: So, it’s repeated it’s only for as long as it’s a residence. Of course when it moves to the children at the end of the 15th year if we’re fortunate enough to live that long then my children would have a trust and perhaps the trust would form an LLC now it’s a rental property but the renters are the parents. And, even have things today where you know the if the children wanted to they could gift us back the value of the rental income so we wouldn’t have to pay necessarily pay the rent. There’s also something a little beyond the scope of what we talk about a reverse cuprit where their children gift us back a certain interest in the cuprit during the period of time that we live there. So, there are a lot of options as we get to the end of the cuprit that we should take into consideration. 

Paul: Yeah, it sounds like you can really tailor the solution.

Harry Barth: Yeah, it’s very good now, there are a couple of downsides. If you want to consider them downsides but, but when you would say cons when we talk about this is that when the children receive the asset receive the homes, as a result of the termination of the cupro because we outlived it and went into trust for them the children will not get a step up, in basis on our death the children would take our carryover basis in the property which is usually works out fine it’s a lot less than the estate tax and a concern that we have today which we didn’t have a couple years ago, is that, when the home transition from myself and my wife to my children in California (this doesn’t apply in every other state that we work in) but in California proposition. The new proposition 19 kicks in and even though we are renting the property from our children’s trust it’s considered a change of ownership and 15, or 20 years later the property will be reassessed with higher, property taxes as a change of ownership up until the time of last November under proposition 13 the transition of a primary residence anyway to our children was no matter what the value was not a reassess able event and right now there is legislation potential to go on the ballot for November of 2022 to perhaps repeal proposition 19 and reinstate the parent-child exclusions which would be very beneficial for Cupro. So cupra is I think a very good tool for people to consider in the right set of circumstances if we have a large home and we have a fairly good size estate given the fact that the estate tax exemptions most likely will be reduced the consideration for analyzing a cuprit qualified personal residence trust and how it fits in someone’s estate portfolio I think is very important. I think this should give everybody a really good smattering of the benefits of a qualified personal residence trust and we look forward to talking to everybody and anybody who would like to inquire further about this particular tool. And, I look forward to our next session where we will continue on wealth protector tv with concepts and ideas that will be useful for everybody in language that we hope that everybody can understand.

Paul: Harry, as usual, has great information and thanks everybody for listening. and Harry, I know we’re going to see you again soon here.

Harry Barth: All right Paul thank you so much! Have a great day. 

Paul: All right!

Harry Barth: Bye!