Ordinarily, if someone transfers assets in which he or she retains an interest, the value of the retained interest is ignored for gift tax purposes. In other words, the value of the gift is the total value of the assets involved. However, this rule does not apply under certain circumstances if the asset transferred is the transferor’s residence.

How does a qualified personal residence trust (QPRT) work?

The transfer must be of the transferor’s residence. This is a residence used by the transferor for the greater of at least 14 days per year or, if it is rented to others, used by the transferor at least 10 percent of the days that it is rented. Fractional interests in the residence can be held in the trust. The trust can contain a reasonable amount of adjacent land.

Only one residence can be in the trust. Nothing else except, with limited exceptions, proceeds payable as a result of damage to the residence provided the trust requires them to be reinvested in a residence. Sale proceeds do not qualify.

The transferor retains the use of the residence for a term of years, at the end of which the residence goes to someone else, usually the transferor’s children. The trust is structured so that all income, credits, and deductions are attributable to the grantor for income tax purposes.

Upon creation of these trusts, there is a gift of the present value of the remainder. See the material on grantor retained annuity trusts (GRATs). As in a GRAT, if the grantor dies during the trust term, the residence remains in his or her taxable estate. If the grantor survives the term, the property is out of the taxable estate.

There are two types of trusts: a personal residence trust and the other is a qualified personal residence trust. The rules for the qualified trust are somewhat more liberal.

These trusts are used to give a residence to children at discounted values for gift tax purposes. If the grantor does not survive the term, there is no harm done since, while the residence is in the taxable estate, the estate gets credit for gift taxes paid.

The grantor cannot retain a right to use the residence after the trust term, but the residence can continue in trust with a provision requiring it to be rented to the grantor’s spouse. Or the grantor can continue to live in the residence and rent it from his or her children, just so long as this was not prearranged.

What is a land trust?

An Illinois land trust is not a real trust. In a real trust, a trustee takes title to assets and exercises all the rights of an owner over the assets. The trustee is responsible for managing and maintaining the assets. In a land trust, this is not the case. The land trustee takes and holds title to land and does nothing else. The beneficiary or beneficiaries of the trust exercise all the other aspects of ownership.

The land trust is created by deeding land to the trustee. The deed is usually called a deed in trust. The former owner and the trustee enter into an agreement usually called a land trust agreement. The trustee is usually a bank with trust powers, and the bank’s standard forms are used. The trustee charges a fee to set up the trust and also a yearly fee.

The Illinois type of land trust exists in only a few other states. Of course, in Illinois and all other states, land can be held in a regular trust where the trustee exercises the full rights of ownership. That type of trust is usually created with customized documents and, as a result of individualized planning, is usually much more expensive.

The land trust in the past was used to conceal ownership. The land records show only the trustee as the owner. The trustee will not tell anyone who the real owner is. The real owner’s identity can be obtained through a legal process after a suit is filed or, in some cases, by government agencies. However, the owner’s identity is much harder to find out when a land trust is used. Of course, if someone who owns real estate transfers it to a land trust, the real estate records will reveal his or her prior ownership, so it is best to take title in the land trust, to begin with, if you want to conceal your ownership. Also, the name and address on the tax bills are public information, so a name and address that will not identify the owner should be selected.

The land trust can be used as a will substitute since the persons who will be the beneficial owners after the original owner’s death can be identified in the land trust agreement. As with a will, this can be amended from time to time.

This also allows the land trust property to be removed from probate. If the land trust agreement says who gets it, no will or statute of descent and distribution is needed. The property no longer exists in the decedent’s estate since his or her interest ended on death.

A regular trust can serve as a will substitute and keep the property in it out of probate too. So is a land trust a substitute for a regular trust? No. In a regular trust, the trustee has active management duties. This feature is absent in the land trust. The land trust also requires that someone have the power of direction over the trustee. This includes the right to revoke or amend the trust.

While the beneficiary of a regular trust could have the unrestricted right to revoke or amend it, trusts are hardly ever set up this way. You might just as well give the assets to the beneficiary outright and leave it to him or her to hire a manager.

Of course, the beneficiary of a land trust could be a regular trust. However, in that case, you would not use the land trust at all. It would just be added complication unless you wanted to conceal the ownership of the regular trust.

Joint tenancies and certain other devices can also be used as will substitutes, resulting in avoiding probate. The land trust’s advantage over those devices is that you do not have to give the takers after death a present interest. A joint tenant has a present interest and must consent to any sale or mortgage of the property. In a land trust, the beneficial owner can designate people to take on his or her death and can retain the right to change or revoke the designation and can retain sole control over the property during his or her life.

Land trusts convert the beneficial owner’s interest from real estate to personal property. The land trustee holds legal title to the real estate. One consequence of this is that the beneficial owners have no right to partition. Partition is the right of co-owners to have real estate divided or sold and the proceeds divided by court order.

How does a QTip trust work?

This is another form of marital trust that qualifies for the marital deduction. Q-tip refers to qualified terminal interest property – property that is not given anywhere near outright to the surviving spouse but still qualifies for the marital deduction. If this provision of the law is used, the surviving spouse need only get all the income from the trust. He or she need not be given the right to say who gets the trust assets on his or her death, although he or she can be given that right. This is great if you don’t want your surviving spouse’s second spouse or their kids to get your property.

This type of trust also gives the executor of your estate additional flexibility for post mortem planning. Your executor is the person you name to establish the validity of your will, collect your assets, pay your bills and distribute the balance as you direct. He or she has the right to elect how much of the trust will be taxable and how much will be tax-free due to the marital deduction.

The Illinois estate tax provides for a separate Q-Tip trust for Illinois estate tax purposes. Since the Illinois exemption of $4,000,000 is less than the Federal exemption, a trust that serves as a Q-tip for Illinois purposes, but not for Federal purposes, is often used to enable the Illinois marital deduction to be used to shelter the amount between the Illinois exempt amount and the Federal exempt amount.

What is the difference between joint tenants and tenants by entireties?

Tenancy in Common

When two people hold property in joint tenancy, and one dies, sole ownership of the property automatically passes to the survivor. No court or other action is needed. A person’s will does not affect such property. It passes to the survivor even if the dead person’s will gives it to someone else. The gift in the will is ineffective because the dead person ceased to own his or her interest at death. More than two people can be joint tenants. On the death of one, the joint tenancy is then divided among the survivors and so on until there is only one survivor.

One subspecies of a joint tenancy is the tenancy by the entireties. It is a joint tenancy between husband and wife in their residence. It is the same as other joint tenancies except for the creditor of just one spouse cannot get the home to satisfy its claims.

There is another type of co-ownership between 2 or more people. This is called tenancy in common. When one of the owners dies, his or her interest does not go to the survivor. Instead, it goes to his or her heirs, or if he or she has a will, as specified in the will. This type of co-ownership is presumed whenever two or more people own property together. It takes special language to create a joint tenancy. The deed or other document creating the ownership must say “X and Y as joint tenants with the right of survivorship.” Otherwise, there will be a tenancy in common. There are some exceptions to this, such as where a bank’s account agreement says two owners are presumed to hold jointly, but it is the general rule.

Whether co-owners are joint tenants or tenants in common, their ownership rights are not exclusive. Neither owns half the property from which the other is excluded. Instead, each owns the whole to which they have equal rights. They are each said to have a ½ (if there are only two owners) undivided interest in the whole. Naturally, this means the property cannot be sold, mortgaged, leased or given away without the signature of both owners. It also means the property is subject to the claims of creditors of both owners. Also, with bank accounts, each co-owner usually has the right to withdraw the entire account. These facts are often overlooked by people who wish to create joint tenancies with their children or others for convenience or to avoid probate. It should also be noted that property held in joint tenancy is includible in the dead tenant’s taxable estate to the extent he or she furnished the money to buy the property. If the joint tenants are man and wife, one half is included, but the marital deduction applies.

How does a life insurance trust work?

These are trusts designed to own or be the beneficiary of life insurance or both. They usually contain certain technical provisions governing the trustee’s powers concerning life insurance. One kind is revocable, designed merely to provide for estate tax savings by using the marital deduction and credit against tax and to provide for management of the insurance funds by someone other than the beneficiaries. The insured can retain the right to change beneficiaries and to borrow against the policy if it has a cash value. The insured’s will very often pours over all other assets to this trust when the insured dies.

The other kind is an irrevocable life insurance trust. The insured gives up all rights over the policy and transfers it to a trust of which he or she is not a trustee or a beneficiary. The object is usually to remove the proceeds from the taxable estate of the insured and sometimes the surviving spouse as well and to provide for trustee management of the proceeds. Special provisions of a technical nature called Crummey powers can be used to allow yearly gifts to the trust up to $5000 per trust beneficiary to be made free of gift tax to pay premiums on the policy. The gift tax is avoided on the transfer of an existing policy into the trust by borrowing against the policy’s cash value of the policy. Frequently a new policy is purchased and transferred to the trust, so there is no gift tax problem on the creation of the trust.

What’s the role of life insurance in estate planning?

Life insurance plays a variety of roles in estate planning. The first is to provide a fund to support the surviving family of a breadwinner who dies young before building an estate. Another is to provide cash in large estates to pay estate taxes, so other assets such as a family business or farm do not have to be sold or borrowed against.

Life insurance can also be used to avoid the estate tax. A life insurance policy, like any other asset, can be given away. If it is given away, it is no longer in the taxable estate of the person who gave it. Yet, it will provide the face value and perhaps more at the death of the person who gave it away. And it can be given away when it has little value, so there is no gift tax. It is the ideal asset to give away since it is usually no use until the insured owner dies. And at that time, he or she has little use for the proceeds. There are sometimes reasons not to give away a policy, though. When a policy is given away, the insured can no longer borrow against the policy. Nor can the insured changed the beneficiaries. Giving away the policy involves giving away these rights. Just changing the beneficiary is not the same as giving away the policy.

Life insurance proceeds are usually income tax-free.

What is a life estate plan?

This is also referred to as a life interest. Someone with a life estate has a right to use the asset in which she or he has a life estate for her or his life. The right can also exist for the life of someone else. The right extends to the use of the asset and the income from it. The right does not extend to consuming the asset. These concepts arose with respect to land. The holder of the life estate, called a life tenant, could farm the land, sell the crops and keep the proceeds. The life tenant could also live in any house on the land. The life tenant could not sell the land outright. Nowadays, this concept is usually applied to financial assets. The life tenant has the right to income, but not principal. For practical reasons, assets to be used by a beneficiary for life are usually put in trust, so a trustee has control over them with the power to enforce the terms of the life tenancy.

Disclaimer: The site is for educational purposes only, as well as to give general information. This blog is not intended to provide specific legal advice. The site should not be used as a substitute for legal advice from a licensed professional attorney in your state.