Qualified Personal Residence Trust

Posted on February 6, 2018

Article written by Jonathan Osler, Esq.

The qualified personal resident trust (QPRT; pronounced “Q-Pert” in estate planning parlance) is a technique that is used to reduce the size of a taxpayer’s estate.  With a QPRT, the grantor creates an irrevocable trust and places property—usually a primary residence or vacation home—into the trust.  The grantor retains the right to use the property for a predetermined number of years, which is established in the trust agreement.  After that period of time has expired, the property passes to the trust’s beneficiaries (typically the grantor’s children), or the property remains in trust for their benefit.

Right off the bat, one should know that the grantor must survive the full term of years specified in the QPRT—if not, the entire value of the property is included in the decedent’s estate, which negates any benefits of establishing the QPRT.  However, the full market value of the property, including appreciation, is removed from the grantor’s estate if the grantor lives through the full term.  Determining whether the QPRT is worth the gamble requires careful planning on the part of the grantor and his or her estate planning attorney.

The above describes the QPRT in a nutshell, but a little more detail is necessary to explain what makes the QPRT tick.  First, the transfer of the residence to the beneficiaries after the term of years expires actually constitutes a completed gift under Internal Revenue Service rules.  To attain the maximum benefit for gift tax purposes, it is important to minimize the value of the gift to the greatest extent possible.  However, minimizing the gift tax value requires a fairly complex song-and-dance, which involves calculating the value of the grantor’s remainder interest, which is based on the number of years set in the trust, along the with the grantor’s life expectancy and the applicable interest rate—as set by Internal Revenue Code Section 7250—at the time the QPRT is created. If you’re still with me after all that, here’s the long story short: A longer term of years and a higher interest rate lowers the value of the gift, and vice-versa (we’ll leave life expectancy out of it for now).  And the lower the value of the gift, the greater the benefit of the QPRT for estate tax purposes.

A positive attribute of the QPRT is that it remains a grantor trust throughout the years that the grantor retains an interest in the property.  Because it is classified as a grantor trust, the grantor may continue to take the mortgage interest deduction (prior to 2018 the grantor could take a full deduction on property taxes as well; currently, the grantor may deduct a maximum of $10,000 in property and state and local taxes, combined) if there is a mortgage on the property.  The beneficiaries have no tax or other liability with respect to the property during the years that the grantor retains an interest in the property.

You may be asking yourself, “What happens when the term of years set in the trust agreement expires?”  That’s a good question, and here’s the answer:  At the end of the term, the ownership of the residence transfers to the beneficiaries.  Commonly, the grantor will continue to live in the house by paying rent—at full market value—to the beneficiaries.  The upside is that the grantor, by paying rent to remain in the property, can move more money out of his or her estate to further reduce estate tax exposure.

An important income-tax consideration with the QPRT relates to capital gains taxes for the remainder beneficiaries.  The beneficiaries will not get a “step up” in cost basis to the grantor’s date-of-death value if they take ownership of the house under the remainder terms of the trust.  In other words, if the grantor outlives the term of years, and the transfer to the beneficiaries is a completed gift for tax purposes, the beneficiaries take the property with the same cost basis as the grantor.  On the other hand, if the property is in the grantor’s estate at the time of death and the beneficiaries take the property by inheritance, capital gains liability is erased because the beneficiaries take the property subject to its new, stepped up cost basis.  In that case, if the beneficiaries turned around and sold the house the very next day, they would owe nothing in capital gains.  Therefore, when considering the QPRT as an estate planning tool, the attorney and the client must discuss the estate tax/capital gains tradeoff.  If the tax basis of the property has increased markedly since the grantor’s initial purchase, or is expected to rise significantly due to market appreciation, alternative options for reducing estate tax exposure may be well worth exploring.

If you have a QPRT, or you may be interested in setting up a QPRT, please contact our offices—we would be delighted to schedule you for a complimentary, one-on-one consultation to review your estate plan.  Additionally, if you are interested in learning more about estate planning in light of the recent changes to state and federal laws, please join us at one of our seminars.

Posted in Estate Planning

Save Thousands During Incapacity Through a Durable Financial Power of Attorney

Posted on January 24, 2018

Written by  Kevin B. O’Donnell, Esq.

A durable financial power of attorney is one of the most valuable estate planning tools when comparing the cost with its potential benefits.  For a minimal fee a properly drafted power of attorney can easily save several thousand dollars during incapacity.  If a potential client has limited financial resources or is reluctant to invest in creating or updating their entire estate plan, I will always encourage them to at least invest in a durable financial power of attorney.

What is a durable financial power of attorney?

            A durable financial power of attorney is an incapacity planning tool involving three parties.  The “principal” is the person who creates the durable financial power of attorney.  The principal appoints a second person as their “agent” or “attorney-in-fact” and grants their agent legal authority to manage his or her legal and financial affairs during incapacity.  The third party involved is usually a bank, financial institution, or other person or entity who must be presented with the durable financial power of attorney and who must accept the agent’s authority for it to be effective.

A durable financial power of attorney generally grants the named agent legal authority to do anything and everything the principal could do if he had capacity.  The agent is a fiduciary to the principal, meaning the agent must act in the principal’s best interests and must not take any action that benefits the agent.  The agent is permitted, for example, to use the durable financial power of attorney to access the principal’s bank accounts to pay for the principal’s medical expenses.  The agent is prohibited, however, from using it to access the principal’s bank account to purchase himself a new car.  If the agent breaches his fiduciary duty to the principal, the agent will be held liable and forced to pay monetary damages to make the principal whole.

A durable financial power of attorney may be immediately effective or “springing.”  If a durable financial power of attorney is immediately effective, the agent has legal authority to act on the principal’s behalf as soon as it is signed.  If a durable financial power of attorney is “springing” the agent’s authority is dormant when it is signed and only springs into effect when the principal is determined to be incapacitated.

Typically, an executed durable financial power of attorney will be placed in a safe or a safe-deposit box and forgotten until the principal becomes incapacitated or directs the agent to take action on his behalf.  The agent will then present the durable financial power of attorney to a third party, such as a bank, to demonstrate that he has the authority to act on the principal’s behalf.  Most third parties will require clear and explicit language supporting the agent’s proposed actions.  If the agent wants to withdraw money from the principal’s bank account, for example, the bank teller will review the durable financial power of attorney for specific language authorizing the action.

Durable financial powers of attorney remain in effect until the principal either revokes the document or passes away.   Once the principal passes away, the principal’s will, trust or the laws of intestacy will control the disposition of their estate and the agent will no longer have the authority to take action on the principal’s behalf.

Do I really need a power of attorney?

Everyone needs a power of attorney to plan for potential future incapacity. No one, including a spouse or child, has authority to access an incapacitated person’s bank accounts, to manage the incapacitated person’s real property, or otherwise handle the incapacitated person’s financial and legal affairs without a durable financial power of attorney.  To obtain the legal authority in the absence of a power of attorney, someone must file a lawsuit in the local circuit court, prove that the person is incapacitated, and ask for an order granting them the legal authority to manage the incapacitated person’s affairs. This process is known as a guardianship and conservatorship proceeding.

Most people are not fond of guardianship and conservatorship proceedings.  First, the incapacitated person has little or no say over who is named as their guardian and conservator.  Second, the person named as guardian and conservator is subject to court supervision, must provide a written inventory of the principal’s assets to an attorney known as the Commissioner of Accounts, and must periodically provide a written accounting to the Commissioner of Accounts detailing how money was spent on the principal’s behalf during incapacity.  The person appointed as guardian or conservator is also required to purchase an insurance policy to insure against potential mismanagement of the incapacitated person’s assets.  The entire process is public, expensive, and can be easily avoided through the use of a durable financial power of attorney.

A durable financial power of attorney accomplishes the same goals of a guardianship and conservatorship proceeding but through much more private and less expensive process.  First, it allows a person to retain control over who manages their affairs during incapacity.  Second, the agent under a durable financial power of attorney is not subject to court supervision and is not required make annual accountings to the Commissioner of Accounts.  The agent may be required to account to the principal’s family but on a less frequent and less formal basis.  The agent is also not required to purchase insurance to insure against mismanagement of the incapacitated person’s assets.  Most people prefer a durable financial power of attorney over a guardianship and conservatorship proceeding when faced with a choice between the two.

Changes in the Law Governing Durable Financial Powers of Attorney

            If you have a durable financial power of attorney that was executed prior to 2010, it is still advisable to have it reviewed and updated by an attorney.  The Virginia General Assembly enacted the Virginia Uniform Power of Attorney Act in July of 2010.  The change in law does not affect the validity of durable financial powers of attorney executed prior to July 1, 2010 but it does affect how all durable financial powers of attorney are interpreted under Virginia law.

There are also important practical reasons for updating a durable financial power of attorney.  Traditionally, powers of attorney were relatively short documents which used broad, sweeping language.  Banks and other financial institutions have become increasingly reluctant to accept an agent’s authority absent explicit language supporting the agent’s requested action.  As a result, many older durable financial powers of attorney are ineffective despite remaining valid legal documents.  An updated power of attorney can provide the comprehensive and explicit language necessary to satisfy financial institutions so that your agent is never unable to act on your behalf during incapacity.

If you have any further questions about durable financial powers of attorney please attend one of our free seminars

Posted in Estate Planning

The Best Holiday Gift: Passing Down Financial Wisdom

Posted on December 22, 2017

Article by Bennie A. Wall, Esq.

With the holidays wrapping up and New Year’s Day right around the corner, now is a great time to reflect on your ever changing family dynamics. As you look around your holiday dinner table at your loved ones, you cannot help but remember how much they have grown over the years. It is hard to believe that since you set out as a young adult trying to make your way in the world, so much has changed and came to be this family you see in front of you.

It is always in early January that I see an influx in clients wanting to come in and visit their favorite estate planning attorney. Many of these clients are just coming in for a check up to make sure that their plan is going to work the way they envision. Over the years, I have had my fair share of clients who come in this time of the year for an update, driven not by their desire to check in, but by their reflection over their most recent family’s holiday dinner.

I am sure you can picture it now. A scene right out of a holiday movie. Your precious daughter brings home the new fiancée. Your son brings home his new girlfriend whose voracious appetite for Prada just cannot be quenched. Or your children giving in to every whelm and desire of your already spoiled grandchildren.

Whether there is a new in-law that you don’t exactly see eye to eye with, you worry about your children’s ability to save for your new grandchild’s future, or your estranged son has given up on the family. I have seen it all. Many times, clients, like you, simply want to be sure that the wealth you have labored your whole life accumulating is well cared for when you are gone.

Many parents worry that their children are not financially savvy enough to properly manage their inheritance and have even less faith in their grandchildren’s generation. These fears are not misguided. A study by researchers at Ohio University found that 33% of people who received an inheritance spent it all within two years of receiving it. Not surprisingly, the numbers are even more staggering when you look only at individuals between the ages of 18-25, 90% of whom blew their entire inheritance in between 12-18 months on average.

Why blowing through an inheritance is so common is hard to truly pin down, but in practice there are usual one of three factors at play: financial immaturity, vices, or entitlement.

Most cases of squandering away an inheritance is due simply to financial immaturity. Seeing this large pool of funds now and how much fun you can have with it is easy to blind even the most responsible of people. The temptation is even stronger with younger adults with less real work and life experience. For many young adults it is harder to truly appreciate the value of a dollar and how far a well saved, invested dollar can grow over time.

So, what can you do to help ensure that your descendant’s inheritances are not used irresponsibly? I have outlined my top three favorite methods below.

Share your wisdom and vision.

One thing you can leave behind that is even more valuable than you wealth is your knowledge and experience, so share your wisdom with your descendants. Tell them your life story and how you grew up, tell them about how you and your spouse worked and saved to amass your wealth, tell them all about your best choices and a few of your worst, and let them know your vision about how you pray this inheritance will enrich their lives after you are gone. Often times this real emotion puts the intangible concept of money in context for your descendants and makes them appreciate the inheritance even more, all the while encouraging them to be good, responsible stewards to their new found wealth.

Write protection into your plan.

A well drafted estate plan can ensure that your descendants do not squander their wealth. There are many options for protection in plans. The most common protection I use in my plans is to require that young beneficiaries not receive control over their inheritance until they are 25 years old. I’ve even had a few clients who insisted on bumping that age up to 65.

For clients who are still not comfortable with a 25 year old receiving the entire inheritance, I often write in that they will receive access to part of the funds at 25, another part at 30, and control over all at 35. This way, if their 25 year old self makes some bad decisions, they get a second and even third try.

If a client’s concern is more than simple financial immaturity, but rather that a descendant has a problem with vices or entitlement, then even stricter protection can be added to the estate plan which can be used as a tool to encourage better behavior and self-sufficiency.

It seems that every family has one member who gives in a bit too strongly to the vices of life. In serious cases, this can lead to real issues with substance abuse or gambling. As a parent or grandparent, you want nothing more than to help that individual get back in line with the straight and narrow, but you sometimes wonder how. In most cases, you want to provide an inheritance for the child, but you also do not want to support their current lifestyle. A great option in these cases are what we call discretionary trusts. A trustee will hold on to funds left for this particular child and will be used to support his or her basic needs. The plan will have incentives built in to it to encourage a healthier lifestyle.

Enlist a professional to manage your descendants’ inheritance.

When all else fails, or you simply want a check on your child/grandchild’s ability to manage their inheritance, consider having a professional trustee, like our law firm: Legacy Fiduciary Services, manage their inheritance. Having a professional trustee will ensure that your planning is followed through and that your wishes are looked after. Professional trustees not only have experience with managing funds and implementing trust, but they also provide a degree of protections from third parties trying to get to your descendant’s inheritance (whether it be a creditor, an ex-wife, or plaintiff in a lawsuit).

These are just a few of the common ways that you may be able to protect the inheritance you are passing down. At the end of the day, a plan can be flexible enough to accommodate almost any of your wishes. If you have any concerns, or just want to learn more about the available options, contact one of our attorney’s today and set up an appointment in the New Year. In the meantime, I wish you the happiest of holidays and all the best in the New Year.


Posted in Estate Planning

Beth Ann Lawson Authors Article for Sentara Living – Legally Prepared for Each and Every Day

Posted on December 12, 2017

Attorney Beth Ann R. Lawson authored the article “Legally Prepared for Each and Every Day to appear in the May issue of Sentara Living.  Beth Ann spoke on the topic of Estate Planning to Sentara employees groups around the Tidewater area in June, July and August of 2017.  Legally Prepared for Each and Every Day by Beth Ann Lawson

Posted in Elder Law, Estate Planning, Special Needs Trusts

Take your Estate & Elder Law Planning Beyond the Basics

Posted on November 3, 2017

A one-day symposium bringing professionals in Estate and Elder Planning, Home Healthcare, Insurance/Investment Planning and other areas, in one location, providing information to those attending with the goal of giving them “Peace of Mind” in their team of professionals. For  more information and to sign up, please click below!

Posted in Elder Law, Estate Planning