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.

Example

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.

Vacation Homes

Do you own or are you considering buying a vacation home?  If you do own a second home or may someday, there are many issues that you should consider.  Here is a link to an article (relatively short) that discusses these issues.  http://tinyurl.com/bgzsvq

Timing is Everything

When markets are down, opportunities abound. People interested in reducing the size of their estates can often maximize their gifting during downturns in the market, both real estate and stock. With respect to real estate, one can gift their residence to their children, retaining the right to live in it, by use of a qualified personal residence trust (QPRT). An article by Mike Spector in The Wall Street Journal indicates that, due to the falling value of many homes, this is the ideal time to make such a gift. Another gifting strategy is available for people who have charitable inclinations. A Charitable Lead Trust (CLT) provides that a charity gets the income from the trust for a set term and then the grantor's heirs receive the remainder. A CLT funded with stock that is likely to rebound and appreciate over the long haul is ideal. If you want to skip giving anything to charity, outright gifts of such stock up to the annual exclusion amount of $12,000 is another possibility. You say you don’t like to gift? Consider selling depreciated stock at a loss to offset any capital gains or to a lesser extent ordinary income. If you fail to see the silver lining in these various strategies, you can do what many people are currently doing…wait for the market to rebound.