Mullen and Iannarone, P.C.
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Using a trust to minimize the tax burden when passing on a home

New York residents who own a residence or a vacation home may be interested in an estate planning method that could reduce the tax burden for those who inherit that property. Using a certain type of trust, the total value of the taxable estate can be diminished.

This type of trust is known as a Qualified Personal Residence Trust. It requires that the owner of the property gift it to the trust for a term of years. After this time is up, the home will then be transferred to the beneficiary of the trust. This is usually a child or other person who would otherwise inherit the property at the time of the homeowner's death. Property owners should only use this type of trust if they know that the inheritor will be able to accept the responsibility of home ownership when the term ends.

In the meantime, the homeowner can live in the home as he or she did before setting up the trust. If he or she continues living there after the term ends, the former homeowner will have to pay the new homeowner a reasonable rental value for the property. The value of the taxable gift that is made at the end of the term is the projected residual value of the home, not the fair market value. This could result in large tax savings for the inheritor.

There could be other tax benefits as well, such as freezing the value of the home at the time that it enters the trust. An attorney could explain these benefits and draft the necessary documents to set up the trust. The attorney might also help with comprehensive estate planning to minimize any inheritance tax that beneficiaries may face.

Source: Wealth Management, "Smart Tax Planning: How Your Vacation Property Can Provide Savings", Venita Zavidny, June 20, 2014

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