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Asset Protection - The Qualified Personal Residence Trust

Many people are afraid they may become subject to lawsuits and liabilities which could jeopardize their financial well being. For most of us, our home represents the bulk of our fortune and it is important to protect if from judgments and creditors. A qualified personal residence trust is a simple and inexpensive device commonly used to protect one's home. Let's take a look at how these trusts work.

How A Qualified Personal Residence Trust Works

The owner(s) of the home transfer title of the home to an irrevocable trust they create. Since the home is owned by the trust, they no longer have legal title, so creditors cannot reach it. Generally, the beneficiaries of the trust are the original owner's children. The term of the trust is the life span of the original owner. At the time of the transfer of the home, the original owner is deemed to have made a taxable gift of a percentage of the value of the equity in the home. However, the original owner can allocate part of the unified estate/gift tax credit to the gift and pay no taxes at the time of transfer. The owner lives in the home. If the owner lives to the end of the term of the trust, the asset passes to the children and is no longer part of the owner's estate for estate tax purposes.

Additionally, if the original owner decides he or she wants the trust revoked, there is California law which will allow an irrevocable trust to be revoked if the trustee of the trust and the beneficiary of the trust sign a simple document.

    Details & Restrictions


    A Qualified Personal Residence Trust contains the following provisions:

    1. the original owner(s) cannot be the trustee;
    2. the trust must prohibit the holding of any property other than the personal residence or one vacation home of the original owner(s);
    3. no distributions to other persons are allowed;
    4. the trust may accept cash for the initial purchase of a residence for three months, or purchase of a replacement residence within three months of the date the cash is added to the trust;
    5. cash can be held for up to six months for payment of trust expenses the property is sold or insurance proceeds received, a two year replacement period is permitted;
    6. if the property is no longer used as a personal residence or vacation home, the trust must terminate and its assets must be distributed to the term holder within 30 days;
    7. a trust may sell a residence, reinvest only part of the proceeds in a new residence, and convert the rest to an annuity as long as interest prepayment is prohibited.

    If you want asset protection for a residence or a vacation home and a reduction in the value transferred to heirs, a QPRT may a good vehicle for you. Call for a consultation. The Law Office of Jane K. Penhaligen can provide these services.

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