Protecting one's real estate assets is an important part of estate planning. Whether one is dealing with real estate connected to a business, rental property, or a personal residence, it is important to consider tools that allow for the protection of these assets.
Among the tools at one's disposal are LLCs and trusts. Trusts, in particular, are quite versatile and useful for a variety of estate planning arrangements. Here we'll take a look at some of the common ways these tools are used in estate planning.
Trusts, as we noted already, are very flexible instruments when it comes to disposing of assets. Trusts can be either revocable or irrevocable, depending on one's goals and family situation. The basic difference is that a revocable trust can be changed at any time after it is established, while an irrevocable trust cannot. There are various advantages to giving up one's ability to change a trust one has established, such as estate tax reduction, asset protection and charitable giving.
One common type of irrevocable trust used in estate planning is the Qualified Personal Residence Trust (QPRT). These trusts allow an owner of real estate to live in the property for a period of time and then pass it on to their heirs. The beneficiaries in these arrangements pay some kind of rent. QPRTs have the advantage of locking in the value of decreased property values so that when the property is sold down the road, there are capital gains tax savings.
Owners of high value real estate could benefit from setting up a QPRT, particularly because of the currently high gift tax exemption, which is $5 million per taxpayer.
There are other ways to use irrevocable trusts for real estate, but we'll take a look at revocable trusts in our next post, as well as LLCs.
Source: Reuters, "Weighing the what-ifs of trusts and LLCs," Beth Pinsker Gladstone, May 3, 2012