Monday, May 17, 2010

Capitalizing on Low Home Values – Meet the Qualified Personal Residence Trust (QPRT)

Most of us have witnessed the highs and lows of investing and understand that timing is everything. This is also evident in the real estate market where the US housing prices continue to struggle. In some circumstances, the stagnant housing market may present an opportunity for one to plan for the purpose of lowering their ultimate estate tax liability. Through the use of a Qualified Personal Residence Trust (QPRT) the grantor can transfer the title of the real estate to the trust and retain the right to continue to use the residence for a term of years with the remainder transferring to children or other beneficiaries. Assuming that the grantor survives the term, the residence will not be included in the donor’s estate for estate tax purposes. At the end of the term, the residence will be distributed to the beneficiaries, or may remain in further trust for the benefit of those beneficiaries. If the grantor outlives the term, the grantor may agree with the beneficiaries or with the trustee to continue to use the residence, so long as the grantor pays fair market rent for this use. The payment of fair market rent avoids a challenge by the IRS that the grantor’s continued enjoyment of the residence draws the residence back into the donor’s estate for tax purposes.

The transfer of the residence to the QPRT is considered a gift by the grantor for gift tax purposes; however, the gift is of a future interest in the property and thus reduces the value of the gift significantly. The grantor uses some of his lifetime federal gift tax exclusion amount or may even incur some gift tax liability now, to save more on estate tax later. If the grantor survives the term of the QPRT, the value of the house, plus any appreciation from the date it was transferred, passes to the children with no additional estate tax.


John transfers a $1 million residence to his QPRT, retaining the right to live in the residence for a eight-year term. The value of the present gift to the remainder beneficiaries might be only 50%, or $500,000. If John survives the eight-year term, the residence will not be included in his estate for tax purposes, nor will any of the appreciation in value of the residence occurring after the initial transfer. If, after eight years, the residence has appreciated in value to $1.5 million, John has succeeded in transferring this amount to his beneficiaries at the same tax cost as a transfer of only $500,000.

To read more about this topic see an article titled, Low home values shine favorable light on personal residence trusts by Robert Celaschi, appearing in Business First's Estate Planning Section, March 19, 2010.

Friday, May 14, 2010

Nonprofits Under the Gun

This morning, the Columbus Dispatch perhaps provided a valuable service to people involved in nonprofits. The article Charities up against IRS deadline also likely caused some hand wringing among these same people who probably finished their cup of coffee and dashed off to their computer to see if their nonprofit was on the list of charities in danger of losing their tax-exempt status with the IRS. The statistics from the article came from the National Center for Charitable Statistic website. The website is a very good source and is now marked as one of my "favorites". I imagine the website might be running a little slow today due to a large amount of traffic. The Dispatch article indicates that approximately 8,900 charities have a filing requirement with most of those having a filing deadline of Monday, May 17.

The good news is that gives most charities enough time to become compliant. If the charity's gross receipts are less than $25,000, all it needs to do is file a Form 990-N (e-postcard) that consists of eight easy questions. If the charity's gross receipts are over $25,000, a Form 990 return is required to be filed. It is possible to get an extension on filing the Form 990.