A Stand-Alone Educational Trust is a type of trust that can pay for educational expenses, solve income tax issues, and provide an important piece of your estate plan. These trusts are specifically designed to manage socalled 529 plans, named after the Code section that creates these state sponsored savings plans. More and more clients are using 529 Plans as an educational savings vehicle for their children, grandchildren and other family members. These vehicles are immensely attractive because they are estate tax free, income tax free, and in some states protected from creditors. However, as you invest more and more money in 529 Plans, it becomes more critical that these assets are managed properly during your lifetime and after death.
A 529 Plan combined with an Educational Trust provides more flexibility to move assets between siblings (the one in medical school will need more money), and just as importantly, provides a smooth transition should you become incapacitated or die. Significantly, the trust funds can also be returned to you should you experience a financial emergency. You can create one Education Trust for all beneficiaries, or one trust for each beneficiary as his or her 'special' gift.
A Qualified Personal Residence Trust ('QPRT') is a type of trust specifically authorized by the Internal Revenue Code. It permits you to transfer ownership of your residence to your family during your lifetime and retain the exclusive right to live in the residence, while reducing the size of your estate for estate tax purposes.
The residence is transferred to the Qualified Personal Residence Trust for a designated initial term of years. Provided you survive the initial term of years, ownership of the residence will be transferred to your family at a fraction of its fair market value. If you die during the initial term of years the property will be brought back into your estate, but you will be no worse off than had you not created the Qualified Personal Residence Trust. You may transfer up to two (2) personal residences into Qualified Personal Residence Trusts.
The Qualified Personal Residence Trust is a particularly noteworthy estate planning tool to reduce federal estate taxes because it permits you to transfer a residence out of your taxable estate while retaining the right to use it during your lifetime. The gift for federal gift tax purposes is based upon IRS published interest rates at the time of the transfer, and this rate does not take into consideration actual appreciation in the value of the property. Accordingly, these trusts are particularly useful to transfer residences in which significant future appreciation is anticipated. The Qualified Personal Residence Trust permits you to continue to enjoy your residence, knowing that the value at the date of death will not be included in your estate.
During the term of years of the trust you have the absolute right to remain in the residence rent free. After the initial term you can be granted the right to rent the residence for the balance of your lifetime for its fair rental value.
During the term of years, you can be the sole trustee or a cotrustee of the trust with complete control over all decisions of the trust and the assets in the trust. You may also sell the residence and buy another residence during the trust term.
Because the Qualified Personal Residence Trust is a 'grantor trust' under the income tax laws, during the initial term of years you are treated as the owner of the property for income tax purposes. Therefore, all items of income, gain, loss and deduction with respect to the trust are treated on your personal income tax return. So for example, the deduction for real estate taxes remains available to you. In addition, favorable capital gains treatment, including capital gain rollover and the $250,000 exclusion of gain are still available to you.