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San Diego Qualified Personal Residence Trust: Disadvantages

San Diego, California has many personal residences as well as rentals and other uses of property. San Diego has been a military and retirement town for many years however this is changing. It is important to understand the disadvantages as well as the advantages of any legal strategy. The Qualified Personal Residence Trust is an example of advanced estate planning.

The most obvious disadvantage of creating a QPRT is that the grantor of the trust has a predetermined limit on his right to occupy the residence, after which time he must give up ownership while he is still alive. The remaindermen (normally the grantor’s children) then will have ownership of the residence, and the grantor will have to pay rent to them. Since many people may find this to be an awkward situation, the QPRT requires a personal decision that should be given careful consideration. It is essential to hire an attorney who understands this complicated estate planning procedure and please feel free to e mail our firm with any questions.

A second disadvantage concerns the amount of income tax liability that will result if the grantor’s children (or other remaindermen) later sell the residence. As the laws change constantly by the IRS, it is imperative that any estate plan take into consideration income tax implications. If no trust is created and the residence passes at the grantor’s death, the heirs or beneficiaries get a “step-up” in basis, meaning that the gain on the sale will be measured against the value of the residence as of the grantor’s death. If a QPRT is created, however, there will be no such step-up and the gain will be measured against the price that the grantor originally paid for the property. Please feel free to contact our firm if we can assist.

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