Can a trust be used to skip generations or shelter real estate?

In a previous post we offered several tips for choosing a trustee. That, in turn, warrants a discussion of some of the more common trusts for which the attorneys in our estate-planning practice get requests.

Readers may have heard of the potential tax-saving advantages of a trust. A credit-shelter trust, sometimes called a bypass or family trust, is set up for this purpose. An individual’s will documentation could specify the trust to be funded up to the applicable estate-tax exemption, with any leftover assets transferred to a surviving spouse. In fact, both spouses might have wills that call for separate credit-shelter trusts, thereby maximizing both of their exemptions. Additional restrictions could also be put on this type of trust, such as indicating that the trust income will be for the support of the surviving spouse, but the principal paid to the individual’s children upon the passing of the surviving spouse.

Trusts can also be a vehicle for leaving inheritances to grandchildren. With a generation-skipping trust, the documentation could specify the income from the trust to be paid to the individual’s children, and the principal paid to grandchildren after a certain date or life event. As with a credit-shelter trust, a generation-skipping trust is usually funded only up to the applicable estate-tax exemption. Otherwise, any excess funding might be subject to a generation-skipping transfer tax.

Individuals who want to fund a trust with their real estate might be interested in a qualified personal residence trust. The grantor can continue living in the property for a specified time, often around 10 years, before the home is transferred to the named trust beneficiaries. A key advantage of this trust is that the IRS values the real estate at less than its current value at the time of the trust creation. For example, if the transfer period is 10 years, the IRS will factor in that time period and reduce the asset’s present-day value, for purposes of the trust. That lower valuation then applies at the end of the 10-year period, even if the home actually appreciated in value. However, a potential downside is that the grantor must outlive the trust: he or she must be alive when the real estate passes to the beneficiaries.

Related Post: “Tips for choosing a trustee,” Newman Law Group, Feb. 16, 2015

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