New Mexico Personal Residence Trust Lawyer

A personal residence trust allows a homeowner to transfer up to two properties into a trust to freeze the properties’ value for gift tax calculation purposes before they are inherited by an heir.

Along with its similar counterpart, the qualified personal residence trust (QPRT), personal residence trusts are most advantageous for someone who is willing to commit to transferring their property to a beneficiary in the near future. When used properly, the trust can lead to significant savings on estate and gift taxes.

Like many trusts that are beneficial for reducing taxes, a New Mexico personal residence trust must follow strict rules to qualify for the expected benefits. Working with a New Mexico personal residence trust lawyer is the best way to form a strategy with a high chance of complying with these rules while also accomplishing your estate planning goals.

Learn more about how a New Mexico personal residence trust works and how to maximize its benefits during a no-obligation case review at New Mexico Financial & Family Law. Call 505-503-1637 or contact us online to schedule your consultation today.

When Should I Reach Out to a New Mexico Personal Residence Trust Attorney?

A personal residence trust provides the largest tax savings benefit during periods when borrowing interest rates are generally high. They also make the most sense when you are likely to exceed your lifetime estate tax exemptions.

Currently, the lifetime exemption amounts are at record high levels, as of 2024: $13.61 million for individuals and $27.22 million for couples. However, these exemption amounts are set to expire at the end of 2025, with no clear indication of whether they might be renewed by Congress.

In addition to considering the current interest rates and estate tax exemption amount, you should also closely look at your personal financial situation and then consider your preferences for how you intend to use your home in the next 5–10 or so years.

At New Mexico Financial & Family Law, we are most likely to recommend a personal residence trust if the following characteristics sound like they accurately describe you:

• Your home is likely to appreciate in value during the trust’s term
• You know with absolute certainty who you want to inherit your house
• You have a plan for moving out of the home or covering rent at a fair market price once the trust terminates
• You are confident enough in your health to assume that you will live longer than the trust’s intended term
• You are likely to exceed your estate tax exemption at the time of your death

If all of these qualities sound like you, reach out to our offices to discuss your options for forming a tax-advantaged trust or using another beneficial estate planning instrument.

How Does a Personal Residence Trust Work?

A personal residence trust is formed when the person gifting a home (called the “grantor,” in trust language) places their home in an irrevocable trust, making the trust the legal owner of the property. At the time the trust is formed, a beneficiary (or beneficiaries) will be named as the eventual owner of the home once the trust term ends.

The trust’s term can be set to any number of years, but it should be enough that the home’s value is likely to significantly appreciate. During the trust’s term, the original owner of the house can still live in it and use it at their discretion.

Reserving the right to live in the home counts as a form of “retained interest.” The grantor’s retained interest diminishes the value of the home, from the perspective of the IRS, compared to if it was gifted with no strings attached.

In addition, gift taxes are paid on the value of the home at the time of the transfer. This calculation actually saves the grantor money compared to if the gift tax was assessed at the time the trust’s term ended since the home’s value is likely to increase while the original owner continues to reside there.

If the home appreciates significantly in value by the end of the trust’s term, the gift tax cost savings will be higher.

Placing the home into an irrevocable trust has the effect of removing the value of the home from the original owner’s estate. This arrangement effectively trades off estate taxes for a reduced gift tax amount.

What Homes Can Be Placed Into a Personal Residence Trust?

A valid personal residence trust only allows the grantor to transfer the home in which they currently reside and one additional home that is used personally by the grantor or their family. These rules bar the transfer of commercial, rental, or other investment properties not directly used by the grantor or their close family members.

What Happens When the Term of the Trust Expires? Can the Original Owner Still Live in the Home?

Once the term set for the trust expires, the home becomes the property of the named beneficiary (or beneficiaries). At this point, the original owner of the home can choose to still live in the home, but they must pay rent for their tenancy at a fair market rate.

While it may seem like an odd situation to pay rent for a home you have likely lived in for decades, this situation actually provides another opportunity for transferring money to children free of gift tax.

What Happens if the Grantor Dies Before the Trust Term Ends?

If the grantor dies before the trust term expires, then the trust is effectively dissolved, and ownership of the home is transferred back to the estate.

Because of the risk of a home reverting back to the estate of the grantor, the grantor should consider setting a term duration for the trust that they are highly likely to outlive.

What Are the Benefits of a Personal Residence Trust in New Mexico?

As mentioned above, there are many different benefits that can be realized by creating a New Mexico personal residence trust. To summarize:

• Avoid estate taxes — The transfer of the home into an irrevocable trust completely removes the home from the original owner’s estate.
• Reduce in gift taxes — Gift taxes are reduced in two ways by a New Mexico personal residence trust:
  • 1) The grantor’s use of the home counts as a retained interest that can be used to deduct from the value of the home, only triggering taxes on the remainder interest.
  • 2) Gift taxes are assessed at the time the home is transferred into the trust, which can produce savings compared to if the taxes were imposed in the future when the home’s value has likely gone up.
• Retain use of the home for a set time period — The grantor can continue to use the home and enjoy it with family as they see fit.
• Provide income to beneficiaries via rent — If the home is used by the grantor after the term expires, they are required by IRS rules to pay the new owner of the home rent at a fair market value with respect to the home’s size and location.
• Promise property to loved ones in advance — There can be a lot of uncertainty surrounding who will inherit what assets when a parent dies, and a home will likely be one of the assets with the highest value. By creating an irrevocable trust, ownership of the home is legally determined well in advance of the parent’s passing.

Possible Drawbacks of a New Mexico Personal Residence Trust

While there are many potential benefits to creating a personal residence trust in New Mexico, the grantor may also want to consider the following possible negative aspects and risks:

• There may be no need to worry about estate taxes — As mentioned earlier, the estate tax exemption amount is currently at an all-time high. With provisions of the Tax Cuts and Jobs Act expiring in 2025, the new exemption amount will revert to its old schedule, which is still fairly high at $7.2 million per person and $14.4 million for couples. A trust may not be needed to avoid further taxes, except by high net-worth individuals.
• The total gift tax savings may not be very high under certain circumstances — Gift tax savings are only realized when the grantor retains the right to live in the home for an extended period of time and the home’s value increases significantly during this period.
• The trust provides no benefits if you die before the term expires — There is always the risk that the home will revert back to the grantor’s estate if they do not survive the total duration of the trust’s term.
• Renting from relatives can be awkward — Some grantors may find themselves unhappy with a situation where they either have to move out of their former home or rent it from their own relatives at a fair market rate. Consider this possibility thoroughly before committing to a strategy with your New Mexico personal residence trust attorney.
• An irrevocable trust means you cannot change your mind — Once the home is placed into a trust, the designated beneficiary cannot be changed unless they die or the home somehow cannot be transferred. In the event that the trust cannot survive its entire term, ownership of the home reverts back to the original grantor.
• Heirs must still pay capital gains taxes on proceeds of the home’s sale — Normally, when a person leaves property to an heir, the value of that property is “stepped up” to reflect its current value. All of the gains in value up to that point are ignored for the purposes of calculating capital gains. With a personal residence trust, capital gains from the time of the home’s original purchase are retained.
• Mortgaged properties can complicate things — Refer to a New Mexico personal residence trust lawyer if the home you’re considering has a mortgage, HELOC, or similar loan where the home’s value is used as collateral.

How Is a Qualified Personal Residence Trust (QPRT) Different From a Regular Personal Residence Trust in New Mexico?

A QPRT is very similar to a personal residence trust, except there are a few key differences:

• The trust can designate partial beneficiaries for the properties’ value, gifting equity in the home to multiple heirs.
• The trust can include cash to pay for repairs, maintenance, and certain improvements for the property, whereas a regular personal residence trust can only include the property itself.
• Proceeds from a homeowner’s insurance settlement can be transferred directly into the trust.
• The grantor is allowed to sell the home to a non-relative if they either leave the sale proceeds in the trust for at least two years or use the proceeds to purchase an equivalent residence within two years unless the trust expires prior to this period.
• Proceeds from the home’s sale can be transferred to a grantor-retained annuity trust (GRAT), rolling the value into another instrument that may provide significant tax savings.
• The grantor may be allowed to retain partial ownership of the home through an equity share.

Like a regular personal residence trust, the trust is immediately dissolved, and its contents are reverted to the estate of the grantor if they pass on before the term of the trust ends. An experienced New Mexico trust attorney can help you navigate these complexities.

Reach out to an Experienced New Mexico Personal Residence Trust Law Firm to Learn More

The benefits of creating a personal residence trust in New Mexico sound simple, but the reality can be more complicated depending on your financial situation — as well as the situation with your family, your health, and your plans for the immediate future.

Making all of these decisions can be tough, but working with an experienced New Mexico personal residence trust law firm will make it easier. Call New Mexico Financial & Family Law today to learn more about how these unique trusts work and whether one can provide you with the benefits you need.

Feel confident about your estate plans, and save as much money as you can by reaching out to our law firm today when you call 505-503-1637 or contact us online to schedule a consultation.