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Top 10 Tips With TOP QUALITY RESIDENCES

A Qualified Personal Residence Trust (QPRT) is a superb tool for persons with large estates to transfer a principal residence or vacation home at the lowest possible gift tax value. The general rule is that if an individual makes something special of property in which they retains some benefit, the property is still valued (for gift tax purposes) at its full fair market value. Quite simply, there is no reduction of value for the donor’s retained benefit.

In 1990, to make certain a principal residence or vacation residence could pass to heirs without forcing a sale of the residence to cover estate taxes, Congress passed the QPRT legislation. That legislation allows an exception to the overall rule described above. Because of this, for gift tax purposes, a reduction in the residence’s fair market value is allowed for the donor’s retained interest.

For example, assume a father, age 65, has a vacation residence valued at $1 million. He transfers the residence to a QPRT and retains the right to utilize the vacation residence (rent free) for 15 years. By the end of the 15 year term, the trust will terminate and the residence will undoubtedly be distributed to the grantor’s children. Alternatively, the residence can stay in trust for the benefit of the kids. Assuming a 3% discount rate for the month of the transfer to the QPRT (this rate is published monthly by the IRS), the present value into the future gift to the children is only $396,710. This gift, however, could be offset by the grantor’s $1 million lifetime gift tax exemption. If the residence grows in value at the rate of 5% per year, the value of the residence upon termination of the QPRT will undoubtedly be $2,078,928.

Assuming an estate tax rate of 45%, the estate tax savings will undoubtedly be $756,998. The web result is that the grantor will have reduced the size of his estate by $2,078,928, used and controlled the vacation residence for 15 additional years, utilized only $396,710 of his $1 million lifetime gift tax exemption, and removed all appreciation in the residence’s value through the 15 year term from estate and gift taxes.

While there is a present lapse in the estate and generation-skipping transfer taxes, it’s likely that Congress will reinstate both taxes (perhaps even retroactively) some time during 2010. If not, on January 1, 2011, the estate tax exemption (that was $3.5 million in 2009 2009) becomes $1 million, and the very best estate tax rate (that was 45% in 2009 2009) becomes 55%.

Even though the grantor must forfeit all rights to the residence by the end of the word, the QPRT document can give the grantor the proper to rent the residence by paying fair market rent once the term ends. Moreover, if the QPRT is designed as a “grantor trust” (see below), at the end of the term, the rent payments will not be subject to taxes to the QPRT nor to the beneficiaries of the QPRT. Essentially, the rent payments will undoubtedly be tax-free gifts to the beneficiaries of the QPRT – further reducing the grantor’s estate.

The longer the QPRT term, small the gift. However, if the grantor dies during the QPRT term, the residence will undoubtedly be brought back in to the grantor’s estate for estate tax purposes. But since the grantor’s estate will also receive full credit for just about any gift tax exemption applied towards the original gift to the QPRT, the grantor is no worse off than if no QPRT have been created. Moreover, the grantor can “hedge” against a premature death by creating an irrevocable life insurance trust for the benefit of the QPRT beneficiaries. Thus, if the grantor dies during the QPRT term, the income and estate tax-free insurance proceeds can be used to pay the estate tax on the residence.

The QPRT can be designed as a “grantor trust”. This means that the grantor is treated because the owner of the QPRT for tax purposes. Therefore, during the term, all property taxes on the residence will undoubtedly be deductible to the grantor. For the same reason, if the grantor’s primary residence is transferred to the QPRT, the grantor would be eligible for the $500,000 ($250,000 for single persons) capital gain exclusion if the primary residence were sold during the QPRT term. However, unless all the sales proceeds are reinvested by the QPRT in another residence within two (2) years of the sale, a portion of any “excess” sales proceeds must be returned to the grantor every year through the remaining term of the QPRT.

A QPRT isn’t without its drawbacks. First, there’s the risk mentioned previously that the grantor fails to survive the set term. Second, a QPRT is an irrevocable trust – after the residence is placed in trust there is absolutely no turning back. Third, the residence will not get a step-up in tax basis upon the grantor’s death. Instead, the foundation of the residence in the hands of the QPRT beneficiaries is the same as that of the grantor. Fourth, the grantor forfeits all rights to occupy the residence by the end of term unless, as stated above, the grantor opts to rent the residence at fair market value. Fifth, the grantor’s $13,000 annual gift tax exclusion ($26,000 for married couples) cannot be used in connection with transfers to a QPRT. Sixth, a QPRT isn’t an ideal tool to transfer residences to grandchildren due to generation skipping tax implications. Ki Residences Singapore Finally, by the end of the QPRT term, the house is “uncapped” for property tax purposes which, based on state law, you could end up increasing property taxes.

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