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.
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6 comments:
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Keep up the great work!
My only question would be tax implications of such a deceptively simple strategem.
thanks for providing such a nice post. really aprreciate your work. keep it up.
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Hi all,
I want to share this great investment opportunity with all of you. I bought a repo house on auction for much less than the market value. I was always skeptic of buying a repossessed house on an online auction. This turned out to be one of the best decisions I have ever made. The process is not as complicated as one may think. Be sure to use a reputable company which will help you through the whole process. A blessing in disguise, since I do not have much time in the day, was that everything was done online. This really helped me a lot with my tight schedule.
I am currently busy buying my second house to rent out. I feel like it was worth while waiting all this time to finally be able to buy property, since I can now get two properties for a little bit more than the price of only one.
Hi all,
I want to share this great investment opportunity with all of you. I bought a repo house on auction for much less than the market value. I was always skeptic of buying a repossessed house on an online auction. This turned out to be one of the best decisions I have ever made. The process is not as complicated as one may think. Be sure to use a reputable company which will help you through the whole process. A blessing in disguise, since I do not have much time in the day, was that everything was done online. This really helped me a lot with my tight schedule.
I am currently busy buying my second house to rent out. I feel like it was worth while waiting all this time to finally be able to buy property, since I can now get two properties for a little bit more than the price of only one.
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