Can a Utah asset protection trust (UAPT) hold a personal residence or a vacation home? Yes.
The Utah asset protection trust statute (Utah Code §25-6-14) contemplates the transfer of a personal residence to a UAPT inasmuch as it permits the trust to authorize the settlor’s use of real or personal property that is held in the trust. The statute also provides that the settlor’s use or occupancy of a residence held in the trust does not constitute a payment or delivery of trust assets to the settlor that could otherwise be reached by the settlor’s creditors. And the statute expressly permits a QPRT (qualified personal residence trust) to be a UAPT.
When considering a transfer of a residence to a UAPT, it is good to keep in mind the following:
First, the $250,000 exclusion from capital gain tax upon the sale of a residence (under I.R.C. §121) may be preserved even after the residence is contributed to a UAPT if (but only if) the trust is a grantor trust for income tax purposes.
Second, the 45% property tax discount that is available for primary residences in Utah should be available even if the residence is held in a UAPT. Eligibility for the discount depends on the use of the property, not ownership.
Third, Utah Code §75-7-816 appears to require that a deed transferring real property to a UAPT indicate on its face that the trust is an asset protection trust. This requirement was enacted in connection with Utah’s prior asset protection trust statute, but applies to the new statute, as well.
Fourth, when contributing a residence to a UAPT, one should consider how expenses associated with the residence will be paid. Such expenses might include property taxes, homeowners’ insurance, HOA dues, maintenance expenses and, if the residence is mortgaged, principal and interest payments. The expenses could be paid by the trust, as where the necessary amounts are pre-funded into the trust or are contributed to the trust on a monthly or yearly basis. Making regular contributions to a UAPT may be inconvenient inasmuch as doing so would require the execution of an affidavit under section 5(m) of the statute each time a contribution is made. Alternatively, the settlor could pay the expenses directly. If the settlor pays the expenses directly, it may be advisable to have a rental agreement in place that spells out the terms of such payments. The statute does not expressly permit, prohibit or otherwise address the method of payment of such expenses.
Fifth, if the residence is mortgaged, the transfer may trigger a due-on-sale clause or otherwise violate certain covenants in the loan documents, and may therefore require the consent of the lender. Because the residence is not income-producing, the lender may require a personal guarantee from the settlor before consenting to the transfer. The statute neither expressly permits nor prohibits such a personal guarantee.
For a discussion of asset protection in Utah in general, go to www.utahassetprotection.org. For a more detailed discussion of Utah asset protection trusts in particular, go to that site and also see related blog posts on this site.
For information on estate planning in Utah, see Basic Utah Estate Planning on this website.
Rust Tippett is the author of this blog post.
Copyright 2013 UNLEPI, LLC, a Utah limited liability company. All Rights Reserved.
This blog post in no way creates an attorney-client relationship between the reader and either Robert S. (Rust) Tippett or Bennett Tueller Johnson & Deere, LLC. The reader should consult with his or her own estate planning attorney regarding his or her particular circumstances.