What Is a Personal/Residential Trust?

Can A P/R Trust Help You?

What Is a Personal/Residential Trust?
March 11, 2014

A qualified personal residence trust is a special type of irrevocable trust designed to hold a first or second home to reduce potential estate taxes after death.

Creating a Personal Residence Trust

A personal residence trust is formed by the use of a trust agreement, which also contains its governing terms. The agreement must conform to IRS rules and regulations regarding personal residence trusts and any applicable local statutory requirements. You, as the settlor or person who is granting the trust, must determine whom to name as trustee. Your trustee will manage the trust, and while you can name yourself, you'll need to name a successor trustee to take up the reins in case something happens to you.

You'll name your beneficiaries -- the persons receiving the property -- in your trust agreement. After you've created a legally binding personal residence trust agreement, you must transfer the legal ownership of the property to the trust. This is usually accomplished by drafting a new deed that gives the property to the trust and filing the document in the appropriate local land records office.

As gifts above a certain amount must be reported to the IRS for tax purposes ($14,000 in total gifts is allowed for each individual in 2017), you'll have to get your property appraised by a professional real estate appraiser for gift tax reasons. An appraiser will determine the fair market value of your property. The gift is reported to the IRS on Form 709, the United States Gift (and Generation-Skipping Transfer Tax) Return, per the IRS. Your personal residence trust is irrevocable, so you cannot end, alter, modify or otherwise change its terms after creation. The trust must meet the requirements set forth by the Internal Revenue Service to enjoy the associated tax benefits and is not the same as a living trust.

The Personal Use Period

According to US law, you must retain the right to live in the property for a number of years, which is referred to as the personal use period. During this time, you're responsible for paying all bills associated with the property, such as local taxes, and handling all the repair and upkeep for your beneficiary's benefit. You may use the property in just the same way as you did before you created the trust, as you've retained the legal right to use it fully.

Once your stated personal use period ends, you're required to transfer legal property ownership to your named beneficiary and must pay rent if you continue to reside there. The rent payments are not held as gifts to your beneficiaries at that point, so the money is not subject to gift tax and will further reduce your taxable estate while passing the money on to your beneficiary. The amount you pay must be considered fair market rent for the area and the type of property.

Consider your stated term with care. If you were to pass away before the trust ends, your property will be included as part of your taxable estate, defeating the very purpose of the trust. As with all estate decisions that involve substantial assets, it is prudent to speak with a trusted professional.

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Photo ŠiStockphoto.com/bowdenimages

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