Andrew Ewalt's Law Blog

Saving The Family Home: Use A House Trust?

Many of my clients want to be certain that their homes go to their children when they die.  As many homes appreciate in value clients also worry about their children having to pay estate taxes on the increased value of the house.  One option of leaving the home to children  is to use a Qualified Personal Residence Trust also known as a QPRT.

Please consult your attorney before considering any estate planning option because there are many pros and cons to each option. Here are some pros and cons for QPRT's:

Pros:

1.  It removes any appreciated value of a house from a parent's estate which can help reduce estate tax liability.

2.  The parents can continue to live in the house during the term of the trust.

3.  Both residence and vacation homes can qualify.

4.  Often more than one home can be protected.

5.  When the trust term ends the children receive the home.

Cons:

1.  Capital gains tax can be a significant factor on the sale of the home because the cost basis of the house remains the same as it was for the parents.

2.  If the parents die before the trust terminates the home will not be devalued for estate tax purposes.  Thus it is very important the parents survive for the term of the trust.

3.  Children will become their parents landlord when the trust terminates.  As such children could evict their parents  or increase the rent to live in the home.

4.  These trusts are very complicated. In order to set one up you will need a lawyer.

 

Eliminating Mortgage Insurance

Mortgage insurance (sometimes called Private Mortgage Insurance or PMI) is insurance that protects lenders against defaults.  Lenders typically require borrowers to pay mortgage insurance if they are borrowing more than 80% of the home’s purchase price.  These days many borrowers are unable to put 20% or more down when purchasing a home and are thus faced with having to pay PMI.  However, if you are tired of making mortgage payments that include PMI there are ways to eliminate it.

1.        Making payments towards the principle of the loan in order to increase the equity to 80% or more

2.        The power of home price appreciation raising the value of the home.

3.        Combination of 1 and 2. 

There can be many factors involved before a borrower can request that a lender cancel their PMI. Thus it is very important that the borrower consult the lender and their attorney before any steps are taken. 

Though it may seem to take forever before PMI can be canceled, when factoring home appreciation and the build up of equity in their home borrowers may be eligible sooner rather then later.