In estate planning, trusts establish relationships under the direction of an individual called a trustor or settlor. Trusts entrust their property to a trustee or trustees for the benefit of others, called beneficiaries.
An individual may create a trust for a number of reasons, including financial gain for the creator, financial support for their surviving spouses, or charitable giving.
Requirements for a Valid Trust
The process of creating a trust is relatively simple.
The trust must meet the following requirements in order to be valid:
- Intent: The trustor must have intended to create the trust when it was created.
- Trustee: There must be a person in charge of managing the trust for the benefit of the beneficiary and transferring the assets to the beneficiary. If no specific person is designated, the court may appoint someone.
- Beneficiary: The trust must state who will receive the trust’s assets.
- Purpose: There must be a specific purpose for the trust that does not involve furthering illegal activity.
- Assets: The trust must have assets, such as money or property. In the absence of assets, a trust cannot exist.
What Is a Personal Residence Trust?
A Personal Residence Trust (PRT) is a type of estate planning tool wherein a property owner transfers the ownership of their residence to an irrevocable trust. Under a PRT, the PRT can retain their right to live in the residence for a specified time period.
Personal residence trusts are often used for the purpose of taking the residence out of the grantor’s estate because they are associated with low gift tax rates. This may be a better option than transferring the property to a relative or a charity. As a result, any appreciation of the residence will be excluded from the grantor’s estate after the transfer.
What Is a Qualified Personal Residence Trust?
A Qualified Personal Residence Trust (QPRT) is similar to a basic personal residence trust with one major exception. In a qualified personal residence trust, the property can usually be sold during the trust term, subject to state-specific limitations.
As such, QPRT’s are generally seen as less restricting than standard PRT’s. However, each may be subject to different restrictions regarding residency terms and tax rates; it may be worthwhile to consult with a lawyer for help in determining whether a QPRT would be favorable over a PRT.
The Qualified Personal Residence Trust (QPRT) is a way to leave a house to a child or other devisee and significantly reduce the tax burden it would place on them.
This involves placing the home in a trust for the benefit of the owner’s spouse or children. The homeowner retains access to the home and all of the practical benefits of ownership. The homeowner controls the trust that holds title to the home.
As a result, the value of the home is removed from the owner’s taxable estate. This greatly reduces the tax burden on the homeowner’s devisees because a home is often the most valuable piece of property in an estate.
However, there are a few caveats. Since the homeowner (or grantor) no longer legally owns the home, they cannot refinance or mortgage it. According to the grant, the grantor-trustee is allowed to live in the house for a specified period of time. After this expires, the grantor-trustee must move out, and ownership will transfer to the person designated in the trust (usually a spouse or child).
In the event of the grantor’s death before the term expires, the residence will be transferred to the person designated in the trust agreement.
What Are the Requirements for a Personal Residence Trust?
Each state has its own requirements for personal residence trusts. In general, personal residence trusts must follow two basic restrictions:
- The trust can only contain one personal residence, which will must be used as the personal residence for the grantor during the duration set forth in the trust agreement;
- The residence cannot be sold during the trust term
It is also usually forbidden to sell the property back to the grantor (or the grantor’s spouse) after the term of residence has expired.
What Can Be Placed in a Trust?
Assets are an important element of a trust. When an asset has a title, such as real estate or stocks, the title should be transferred to the trust.
There is no title to personal property, such as jewelry, clothing, and furniture. By transferring the property rights to the trustee, these items can also become assets of the trust for its beneficiaries.
Life insurance policies, retirement accounts, pension plans, and health savings accounts cannot be transferred to the trust since their distribution is determined by the named beneficiary. Trustees must be named beneficiaries in order to place assets derived from these items in trust.
Who Is Considered a Valid Beneficiary?
As long as they are properly named in the trust document, anyone can be a trust beneficiary.
Beneficiaries are typically spouses, children, grandchildren, and friends. Depending on the trust, pets, coworkers, strangers, or employees may also be beneficiaries. Beneficiaries of trusts must be definite and certain. The trust must be ascertainable when it is created. The description of a beneficiary must be detailed enough to allow the court to identify them.
What Is a Successor Trustee?
The settlor usually names themself as trustees of a living trust during their lifetime. A successor trustee should be named if the settlor becomes incapacitated or dies. It is the successor trustee’s fiduciary duty to act in the beneficiaries’ best interests.
What Is a Pour-Over Will?
It is common for people to fail to transfer some property into their trust before they die. To solve this problem, pour-over wills are used in conjunction with trusts. Upon death, the deceased’s property is transferred into their established trust.
As a result, if the deceased dies before all their property is transferred to the trust, a pour-over will ensure all property is transferred. When the trustor creates a pour-over will, the property outside of the trust does not have to go through probate, which they hoped to avoid.
What are Some Other Issues Related to Trust Law?
There are several requirements for creating a trust that must be satisfied for the trust to be valid.
- Intent: The trustor, or creator of the trust, must have intended to create the trust at the time of creation;
- Trustee: There must be an individual in charge of managing the trust for the benefit of the beneficiary and transferring the assets to the beneficiary. The court may appoint an individual if no specific individual is designated;
- Beneficiary: The trust must state who shall receive the assets in the trust;
- Purpose: There must be a specific purpose for the trust that does not involve illegal activity; and
- Assets: The trust must contain assets, such as money or property. A trust cannot exist without assets.
Some items cannot be transferred into a trust. These include:
- Life insurance policies;
- Retirement accounts;
- Pension plans, and
- Health savings accounts.
These items cannot be transferred into a trust because their distribution is determined by the beneficiary named in the policy. For these items to be placed in the trust, the named beneficiaries must be the trustee. A trust attorney can advise you on what property can be placed in a trust.
Do I Need a Lawyer for Help With a Personal Residence Trust?
A personal residence trust can be a very useful estate planning tool. If you have any questions or need help with a personal residence trust, you may wish to speak with a qualified trust lawyer in your area. A personal residence trust can be drafted and created by your attorney so that the terms work in your favor.