Quality Planning May Realize Estate Tax Savings
The "family home" has long been an asset passed from generation to generation among the wealthy. Yet with estate tax rates a potential hazard and such homesteads appreciating over time, the ultimate taxes due on such family transfers may become a concern. A Qualified Personal Residence Trust (QPRT) may be just the estate planning technique to keep the home in the family at a possibly cheaper tax cost.
With a QPRT, an individual transfers a home to a trust for a stated number of years while retaining the ability to live in the home. An individual utilizes a QPRT for mainly two reasons: estate freezing and gift tax leverage. Estate freezing occurs because the value of the home will be fixed as of the date of the creation of the trust. Thus, provided the individual outlives the trust, all appreciation of the home within the trust may escape estate tax even though he or she retains full use of the home. Gift tax leverage occurs because the gift tax value of the transaction is not based on the full market value of the property. Instead, only the discounted economic value of the home the individual retains over the term of the trust is considered a taxable gift.
Let’s consider the example of Mr. Smith, age 60, and his wish to transfer the family home to his heirs. The value of the home is currently $500,000 and if gifted outright to the heirs would cause a sizable gift tax because the tax would be based on the current market value. Possibly worse, Mr. Smith could continue to keep the home and leave it to the family in his will. The home's then full value would be subject to estate taxes. After learning this, Mr. Smith wishes to ultimately transfer the home to his heirs but in a more efficient, and less costly, manner.
By considering the use of a QPRT, Mr. Smith could potentially transfer his $500,000 home for a tax value of only $154,115. This assumes he uses a 15-year trust and an IRS valuation rate of 5.4%. Also, all future appreciation of the home would be transferred to the heirs through the trust and out of Mr. Smith’s estate. If the home appreciates in value at a rate of 4% per year in the future, Mr. Smith’s $500,000 home could potentially reach $900,000 in value at the end of the 15-year term. In summary, upon Mr. Smith surviving the 15-year term, the QPRT could facilitate the transfer of his $500,000 home for a gift tax cost of $154,115 even though the home could potentially appreciate to $900,000 by the time it is transferred to the heirs.
Keep in mind that using a QPRT is not without it’s costs. This, of course, takes us back to the old adage that you don’t get something worthwhile for nothing. If the individual passes away during the term of the trust all bets are off and the full value of the asset may be included in his or her estate for estate tax calculations. For these and other reasons, it remains important to work with an estate planning attorney and your financial advisor to evaluate all alternatives before adopting any estate planning strategy.
Lynn Siewert is the Principal of Advanced Corporate Planning and Branch Manager of the Vancouver, Washington Office of Supervisory Jurisdiction, Licensed through First Allied Securities, Inc. Member NASD/SIPC
NOTE:
ALL information contained in this site is for illustration
purposes only, and by NO means should be considered individual tax or
legal adivce under any circumstances whatsoever!
Lynn R. Siewert AIMC
Pension Consultant | Branch Manager
CA Insurance License #00B00579
2005 E. Evergreen Blvd
Vancouver, WA 98661
Ph: 360-750-9626
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