For most of us (at least up until the real estate crash of 2007-2008!) our major asset is our home and the “equity” we have in our home, which is the excess of the value of the home over the mortgage against it. While it is possible to file a “homestead” to protect our home equity, even if the homestead will, for now cover our home equity against possible creditors, there are certain risks that the homestead cannot protect against. The good news is that with recent court rulings, we can confidently establish Nevada personal residence trusts, qualified personal residence trusts, or QPRTs to protect our homes from all types of risks.
Purposes of the Personal Residence Trust
The personal residence trust has generally been viewed as a means for reducing estate taxes, in which case it may be referred to as a Qualified Personal Residence Trust or “QPRT”. However, with the increase of the federal estate tax exemption to $5.25 million for each person, the need for estate tax reduction has been eliminated for all but those who have significant assets. Nevertheless, the personal residence trust (“PRT”) should be considered by everyone who wants to make sure that their home will be protected from creditors, including from lawsuits, income taxes, Medicaid liens, nursing home costs, and so forth. Although the homestead will protect the home equity from a lawsuit, if you have home equity and need to go into a nursing home, the home equity will ultimately be at risk.
Example of PRT or QPRT
For example, let’s say you have $150,000 of home equity and $1,500 per month in social security income. If you are single and need to go into a nursing home, your Social Security income will be applied to your nursing home expenses, and the shortfall will be paid from your home equity, and once the home equity is used up, then Medicaid can kick in to pay the shortfall. And remember, if you were to give the home away, say to your children, before entering the nursing home, you can be automatically disqualified from Medicaid benefits for up to five years following the transfer of your home to your children.
With the PRT you may put the home into a trust and you can retain the right to live in the home for a period of years of your choosing. There is no limit on the number of years for which you can retain the right to live in the home, but the trust must designate a number of years. Without going into the details, since you don’t have to worry about estate taxes, you can retain the right to live in the home for a period of years equal to your life expectancy. If you die before you reach your life expectancy, then the home will be included in your estate for estate tax purposes, but this is not a concern because there won’t be any estate taxes to pay anyway.
Court Cases Support PRT Planning
Recent cases have held that as long as the Personal Residence Trust was established at a time when you were current with your obligations, and it is clear that you were not setting up the trust to avoid current creditor, and that the trust was not set up in anticipation of a lawsuit which you knew might be filed, then the trust should protect the home from any kind of claim, whether it be the lawsuit, the IRS, Medicaid liens at death, and so forth.
Because this type of planning does not necessitate complicated estate tax calculations, the Personal Residence Trust can be established for a reasonable cost and will provide the strongest possible protection for your home.
If you would like to learn more about this, be sure to call one of the experienced attorneys at Grant Morris Dodds, phone number 702-938-2244, for a free consultation.