Colorado is famous for the beauty of its mountains and wilderness. It should come as no surprise that many people elect to purchase a vacation home or mountain cabin so they can get away from it all and enjoy the scenery and recreation. As part of the legacy that you have spent a lifetime creating, you should make sure to take certain steps to protect your vacation home/ mountain cabin for your beneficiaries. One tool with both estate planning and asset protection benefits is sometimes referred to as a “cabin trust”.
“Cabin trusts” have different names in different jurisdictions, but in Colorado their official name is a qualified personal residence trust (“QPRT”). A QPRT is an irrevocable trust. The primary advantage of transferring either your primary residence or vacation home to a QPRT is to remove such residence from your taxable estate. A QPRT can only be used for either your main home or your vacation home – it cannot be used for commercial real estate. Additionally, note that the applicable Treasury Regulations make it clear that although the term “personal residence” does not include personal property or household furnishings, it does include appurtenant structures such as a guest-house or adjacent land that is reasonable for residential purposes.
After the QPRT is established, it is difficult to undo and transfers to a QPRT are considered a permanent transfer. The QPRT may permit the sale of the residence, except that no sale or transfer of the residence can be made to the transferor, his or her spouse, or any entity controlled by either of them, except for a distribution (for no consideration) of the residence to the transferor’s spouse. Once a residence is transferred into a QPRT, the transferor can continue to reside there, rent-free, for the term of the QPRT, but must relinquish the residence to the transferor’s named beneficiary(ies) at the conclusion of the QPRT’s term. While the transferor resides in the residence, he/she will continue to responsible for the extra costs associated with home ownership, such as real estate taxes and regular maintenance. The transferor will also continue to be able to claim the tax deduction for the residence. If the transferor passes away prior to the QPRT’s termination, the residence would be transferred back to the transferor’s estate, with such estate possibly being subject to estate taxes. Fortunately, the transferor’s estate will receive credit for the initial tax consequences incurred when the QPRT was initially created. This means that even if the transferor passed away prior to the expiration of the QPRT’s term, the transferor’s estate would not be worse off than the scenario in which the transferor never created the QPRT. Be advised that if the cabin or residence are still subject to a mortgage, this could create significant complications in creating the QPRT.
In addition to being an effective estate planning tool, QPRTs can also provide asset protection to the transferor in the sense that a creditor would gain no more right to the QPRT’s assets than those possessed by the transferor/beneficiary. A creditor may be able to receive the right to use the residence for a term of years, which may equate to collecting rent on the property, which may be less attractive as opposed to a total liquidation of the residence.
There can be significant advantages to creating a QPRT. Contact us today to talk about your estate and what strategies we have to help you protect your investments.