Hi, I am looking for bite-sized information about Qualified Personal Residence Trust, specifically transferring an estate to a child. I am hopeless about taxes and hoping someone can put this into plain English for me. Perhaps I should see an accountant.
My Dad’s in trouble and quite a bit of IRS and personal debt. I thought that, perhaps, if I could hold the residence in my name, my Dad could sleep easier at night knowing that, even if worse comes to worst, he won’t lose his home.
I’m confused about how these trusts work, though. Apparently the IRS re-calculates the worth of the house and that’s the taxation due on it. I’m confused as to which taxes then I would be responsible for paying. Would the mortgage debt pass along to my name, too? Would the value of the house count as income for me? Would Dad have to pay me rent? And then there’s the “Dad has to stay alive for the duration of the trust” in order for the full tax benefits to be granted? I’m confused on that, too.
I want Dad to keep his home, but I can’t afford to pay a lot out-of-pocket either, and if this is going to mean a great amount of taxes for me, it would be a no-go.
If anyone with any experience could chime in or provide helpful resources for me, I’d really appreciate it.
I’ve never heard of this kind of trust, but several general issues come to mind:
[ol]
[li]The IRS might slap a lien on the value of the house, preventing him from transferring ownership. His other creditors might do the same (not sure if private debtors can do such a thing). [/li][li]Ignoring mortgages etc, if your father “gave” you the house, it’s probable he’d need to file a gift tax return. And, if the value was high enough, he might need to pay gift tax. There are limits, e.g. the value has to exceed something like 13,000 in a single year or 1 million in a lifetime, before gift tax is an issue. [/li][li]Asset disposition in a bankruptcy (if he’s considering that) won’t usually take your house, but it depends on the type of bankruptcy. I have only a vague idea as to which sort allows him to keep the house. A bankruptcy court is likely to take a dim view of assets recently transferred out of his name, anyway. I believe they can even order the transfer “undone” with some assets.[/li][li]Mortgage: The mortgage wouldn’t be in your name (unless you refinanced), but someone would have to keep paying it, or the bank would take the house. Depending on how the mortgage is written, and how much of a stickler the bank is, they could invoke a “due on sale” clause and demand you repay the whole mortgage right away, which would pretty much mandate that you refinanced. Some won’t bother, especially if you keep up with the mortgage payments. But note that the existing mortgage won’t do anything for your credit history.[/li][li]As I understand it, if your father transfers the house to you, you assume his entire basis (purchase price, plus improvements. So if you sell the house later on, you pay taxes on a lot more gain than if you’d inherited the place, or purchased it at market value. For example: he bought the house for 100,000, and has put 20,000 in improvments. His basis is 120,000. The house is worth 400,000 now. If you sell it later on for 500,000, you have a capital gain of 380,000 - enough to trigger taxable capital gains if you’re single. If you inherited the house right now, your basis is the 400,000, and your capital gain later on is only 100,000.[/li][/ol]
I have heard of something called a “life estate” in which typically a man (or woman) dies, the house is inherited by his kids, but they have to let Mom live in the house until her death.
Bottom line, I really think you’d be wise to have a consultation with a lawyer, even if only an initial meeting, before proceeding with this.
I presume he’s creating a trust to hold the house?
Transfers done in anticipation of bankruptcy (i.e. to hide assets, to cover one debt in preference of others) can be reversed. I heard that in Canada they can go back 6 months to undo any transactions.
Yes, most bankruptcies let you keep the family home.
Transfer a house title (to a trust or person), gift it, etc. and it’s the same as if you sold it for fair market value, in terms of settling the taxes due based on fair market value. If house prices there are depressed, now would be the time to do it.
Mortgages rarely transfer without the consent of the mortgage lender. You can’t unload your debt obligations, or the asset backing them, on a third party. At very least, the bank would want you both to be personally liable for the balance, as well as having the asset of the house to sell as the final resort. But why would they give a mortgage to a trust? What income does it have? How do they know its manager is trust-worthy?
What’s the logic. You gift the trust with the house- basically dad has given away his one major asset that is presumably in the black; that’s gotta tick off the other lenders. If he’d sold the house he’d net, let’s say, $30,000; instead he has nothing. What are the odds they’ll try to get the court to reverse the transaction as an attempt to shield assets from debt collection - especially since that’s what it is. If there’s a big mortgage outstanding, who’s going to pay it? The court won’t let him pay an excessive rent to a no-arms-length group (the trust) and deduct that from disposable income to pay other creditors. they’ll tell him to find a cheaper lodgings or reduce the rent to fair market value.
The only thing he can do is sell you the house for close to market value or a bit less, and you hope he keeps paying the rent so he can keep living there; he in turn hopes you won’t flip the house and shaft him for a few thousand dollars profit, or that your wife doesn’t leave you and take half the house with her, force a sale, etc.
A QPRT is usually motivated by strategies to minimize estate tax on appreciated real estate. In other words, you pay gift tax on the current value of the house rather than estate tax on the value when you die. The IRS doesn’t do any of this calculating for you - you’ll need to fill out the forms yourself or hire someone qualified to do it.
A gift is taxable only to the person giving the gift, and only if they’ve already exceeded their lifetime limit (the so-called unified limit, though it hasn’t been unified for quite a while). For most people who have given less than $1 million in property away, this limit means they’ll file a return by pay no tax.
Mortgages and deeds and liens are why there are lawyers. I won’t even try to comment on that part.
You’ll need a lawyer to set up the trust anyway. Any DIY solution for a QPRT sounds to me like handing a chainsaw to a three-year-old.
Before you even get serious about a trust, first look into bankruptcy. This can clear personal debts and some tax debts (though most tax debts will survive a bankruptcy). You should be able to get a free consultation from an attorney.
Then, if the bankruptcy can’t clear the taxes, look into options with the IRS. You can set your father up as non-collectible (no payments due until his income goes up, which might be never), set up an offer-in-compromise (IRS agrees that he’ll never be able to repay the full amount and settles for something less) or set up a monthly payment agreement. Even if the payment agreement is all you can get the IRS to agree to, these are quite reasonable: interest and penalties are about 10% per year, and the payment plan can be automatically accepted if the debt is less than 50,000 and will be paid off in 60 months. (which means that the IRS might be willing to take as little as $830/month on a $50,000 debt even without any special review, and a review might be a smaller amount).