15 December 2007
The family residence is so often much more than just a house. Traditions are born there and it often serves as the heart of family gatherings. Effective and smart planning can keep this valuable asset in the family without placing undue burden upon future generations, encouraging your family traditions well into the future – and maximizing the tax benefits to your estate plan.
Your residence is often a significant portion of your net worth and presents its own unique estate planning opportunities. You can maximize the benefit of your estate plan for transferring assets to your family or friends by creating a Qualified Personal Residence Trust (QPRT).
Qualified Personal Residence Trust
A QPRT is a trust to which you transfer the title to your home. Under the terms of the trust, you reserve the right to reside in the house for a certain period of years. At the end of that period, ownership of the residence passes to your children (or whomever you wish to benefit).
If you gave the house outright to your children right now you would be subject to gift tax on the full market value of house. But if you give the house away through a QPRT, the value of the gift is discounted because the beneficiaries have to wait until the end of the term before ownership passes to them. The value of the gift to your children is considerably lower because your right to use the house for a term of years discounts the value of the transfer. This can result in a significant transfer tax savings.
It is important to keep in mind that at the end of the QPRT’s term, your children will actually own your home. At that point, you may move out or start paying rent to your children. While paying rent to live in your own home may sound unusual, that is actually another way to remove assets from your taxable estate and transfer wealth to your children. Other techniques can also be used to transfer additional cash to your children to allow them to maintain the residence after ownership has passed to them.
The terms and potential tax savings of a QPRT depend upon the client’s age and the value of the house. In order for this technique to be effective, you must outlive the term of the QPRT. Younger clients can create QPRTs with longer terms, and a longer term lowers the present value of the gift. Under current law, if a 55 year old client with a $1 million home creates a 10 year QPRT, the potential estate tax savings is approximately $340,000 if the home appreciates 2% percenta year; if the home is initially worth $2 million, then the potential tax savings is almost $675,000. As is true with most tax and estate planning, you can maximize the value of long-term strategies and remove appreciating assets from your taxable estate by beginning the planning process today.
Your home is much more than a smart investment. It can help you transfer assets to your children, save estate taxes and keep an important asset in the family for the next generation’s enjoyment. Through proper planning and possibly the use of a QPRT, you may realize substantial benefits not only for yourself, but also for your loved ones.