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Trusts for a personal residence: usefulness can change over time

Trusts are creative instruments designed to respond intelligently to specific situtations. They've been around in various forms for hundreds of years. But the effectiveness of particular types of trusts varies over time.

A current example of this is the qualified personal residence trust. In 1990, when these trusts were first created, they were intended to be a strategic way to shield the value of a home from estate tax upon the homeowner's death. Instead of including the home in the estate, a qualified personal residence trust enabled ownerships interests in the residence to be transferred in a way that minimized the impact of estate tax.

Now, however, people engaged in estate planning in Massachusetts and across the country are reconsidering the usefulness of this type of trust.

The reason for the reconsideration is that the threshhold for the mposition of federal estate tax has risen substantially in recent years. When qualified personal residence trusts were first introduced, the exlusion limits for federal estate tax were much lower than they are today.

In practice, then, federal estate tax only comes into play for very wealthy individuals. The threshold amounts are $5.25 million for individuals and $10 for couples.

Does it make sense, then, to unwind a personal residence trust that is already in place? By "unwind," we mean ending the trust and letting the value of the home pass through the estate.

The answer to this question depends on several factors. The size of the estate is one factor. The value of the home is another. It is also important to be aware of the potential capital gains impact on heirs, if the trust is ended.

Source: The Wall Street Journal, "Strategy to Counter Estate Tax Less Appealing," Arden Dale, July 10, 2013

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