Mar 7

Written by: David A. Brown
3/7/2012 4:07 PM  RssIcon

When an estate is in excess of the Unified Credit, gifting assets is a good way to avoid future estate taxes.

A Qualified Personal Residence Trust (QPRT) is one of the best tools to use because it is so simple.

While we still have a $5,000,000 exemption we should all be encouraging our clients to make gifts this year, assuming it is a taxable estate.

Here are a few of the characteristics of a QPRT:

1. Transfer the home or homes (a couple is allowed to transfer up to 4) at a significant DISCOUNT.
2. The gift FREEZES the value at the discounted gift value, so if the home appreciates by the time the client dies all of the appreciation is out of the estate.
3. While the client is living they still live in the home just like they always did.
4. If they are married there is no “rent” due at the end of the “term” unless they want to pay rent. Some couples like the idea of paying rent to the kids after the term as a further means to help the kids and reduce the estate tax. Many clients to do not want to pay rent because it feels unnatural and they may not be able to afford the rent payments. The rent issue is an option for married couples. You can pay rent, or not, depending on what you prefer.
5. The title (in the no rent model) is always in your name until you die and yet there is zero estate tax. For example, for a couple age 55, with a 1M dollar home, the tax savings at life expectancy (36 years) is almost $2,000,000, because at 4% growth the home will be worth $4,103,933 in 36 years. There may be more or less growth, nobody knows, but you can see that these tools can save a great deal of tax over an extended period of time due to the “freeze” effect. This is because all of the growth is out of the estate since the home was “given” to the trust years ago.
6. Since the title is still in your name, and you are the trustee, this feels like nothing has changed. You can still move, sell the home, rent the home and take the income, and do all of the things you would normally do.

This is a brief summary of what a QPRT can do. If you need more information please call.