Tag: homeowner

What Is a Qualified Personal Residence Trust and Can You Create One?

A qualified personal residence trust could help you limit estate and gift tax exposure while allowing you to live in your home for years to come. This estate planning device also passes on your house to your relatives or other beneficiaries of your choice.

How Does a Qualified Personal Residence Trust Work?

To create a qualified personal residence trust (“QPRT”), a homeowner transfers his or her personal residence to a trust specifically prepared to meet IRS QPRT requirements. The trust language states that the trust’s creator (the homeowner) retains an interest in the house for a set number of years. During that time, the homeowner can live in the house rent free. After those years pass, the house passes to designated beneficiaries such as children.

What Are the Tax Benefits of a Qualified Personal Residence Trust?

The main benefit of setting up a QPRT is reduction of gift or estate taxes. If a homeowner were to give his or her children the house directly, the IRS would assess gift tax on the transfer. Depending on the value of the home, this tax could be quite expensive. The situation is similar if the homeowner leaves the house to the children in his or her will.

Starting a QPRT can greatly reduce the potential gift or estate taxes. Basically, because the homeowner retains an interest in the home for a set number of years listed in the trust, the gift’s value is reduced by the value of that interest. As long as the homeowner survives past the set number of years, the gift’s value goes down and thus reduces the amount of gift taxes due.

Further, because the house gets transferred to the chosen beneficiaries, it is no longer part of the homeowner’s estate, which could reduce estate tax liability in the future. A smaller estate means less likelihood that the estate will owe taxes.

How Can You Get Started Making a QPRT?

There are many pros and cons to QPRTs beyond the scope of this blog. For example, the IRS has extremely strict requirements for what constitutes a qualified personal residence trust. You can only place your primary residence, as well as a small amount of cash to cover home expenses, in the trust. Any modifications to the house after the trust is created can affect the QPRT’s effectiveness too. As a result, you should consult a lawyer if you are interested in forming this kind of trust. With the lawyer, you can explore whether a QPRT is right for you.

Want to start planning your estate? Local attorney Andrew Szocka, Esq. provides thorough and speedy estate planning help in the Chicagoland area. To schedule a free initial consultation, visit the Law Office of Andrew Szocka, P.C. online or call the office at (815) 455-8430.

Mortgage Debt and Estate Planning in Illinois

When you have a mortgage on your house that you won’t pay off any time soon, you need to factor that debt into your estate plan. A mortgage is a significant debt that can affect the value of your total estate, diminish inheritances that you leave, and burden co-owners with payments.

What Happens to a Mortgage When the Homeowner Dies?

Mortgages do not disappear when the homeowners die. Instead, the mortgage companies may seek repayment of the mortgage debt from the homeowners’ estates or even change the mortgages’ terms for the surviving co-owners.

When only one person took out the mortgage, the mortgage company can make a claim against the deceased person’s estate. Estate executors must notify all creditors and allow them time to file claims. Before the deceased person’s assets can be distributed to heirs, the creditors who made claims get paid from the assets. This diminishes the inheritances that heirs receive. If the deceased person’s assets are not enough to pay all creditors, each creditor gets some of the assets. Then the heirs inherit nothing.

A mortgage is often the largest debt that the estate must pay. If it is large enough, paying it back can wipe out all of the assets – including the house itself. The executor might have to sell the house or give it up to the mortgage company.

What If More Than One Person Owns the House?

When there are two or more homeowners, the mortgage is probably in both people’s names. As a result, the surviving homeowner usually becomes liable for paying the mortgage when one homeowner dies. In some cases, it might be an opportunity to refinance, or the mortgage company might try to make changes in the mortgage terms. In other cases, it is a financial disaster because the surviving homeowner can no longer afford mortgage payments.

Estate Planning Around a Mortgage

Some people choose to have their houses owned by trusts to avoid the issues described above. However, it might be difficult to get a mortgage or change the owner on a mortgage if you start a trust (talk to a lawyer and your mortgage company for details). There are some other options like having the home owned by a business, choosing ownership by only one spouse, or even provisions in a will requiring sale of the house upon the homeowner’s death. Again, talk to your estate planning lawyer about what is best for you, especially if you are retiring and still owe years of mortgage payments.

In debt and want to start planning your estate? Local attorney Andrew Szocka, Esq. provides thorough and speedy estate planning help in the Chicagoland area. To schedule a free initial consultation, visit the Law Office of Andrew Szocka, P.C. online or call the office at (815) 455-8430.

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