|
The Death Tax Is Likely To Live On, So High
Net Worth Individuals Might Consider a Qualified Personal
Residence Trust
The Obama Administration has indicated its plans to block the
estate tax from disappearing in 2010, though to offer a bit of
relief, it might freeze it at the rate and exemption levels that
took place this year.
That would mean that estates worth up to $3.5 million for
individuals and up to $7 million for couples would be exempt
from any taxation and those above those amounts would be taxed
at 45 percent. (At the end of the Clinton Administration,
estates of less than $1 million would be excluded with the rest
taxed at a 55 percent rate.)
Even with the downturn in the real estate and stock markets,
it's a good time for high net-worth individuals and couples to
look at ways to shelter their estates from the possibility of
taxes going forward. One possibility for couples who have a
substantial investment in real estate they consider a residence
is the Qualified Personal Residence Trust (QPRT). A QPRT is a
trust that owns the home at a discounted value for a specific
term while allowing the parents to continue living in the home.
The QPRT works best for those people who expect to live
another decade or so. The longer the term of the trust, the
greater the benefit to the kids. Yet you're essentially playing
a game of chicken with the Grim Reaper — if one or both of the
parents die before the trust expires, the heirs have to pay the
estate tax on the value of the house at the time the parent
died.
A good first step in finding out if a QPRT makes sense is a
trip to see your CERTIFIED FINANCIAL PLANNER™ professional or
your tax or estate planner. Such a trust has to be set up
carefully with a thorough review of actuarial tables and a
discussion of each parent's financial history.
Technically, QPRTs make the most sense when interest rates
are high, because the higher the interest rate, the greater the
discount applied to the property, which, in turn, increases the
tax savings. A QPRT is based not on the current value of the
house at the time the trust is being written, but what is
determined to be the present value of a future gift, which is
actually a discount to the current value. When a home is put
into the trust its value is not the current value of the house,
but what is called the "present value" of the future
gift — a decrease of 25-50 percent in value. The Internal
Revenue Service calculates these formulas, so ask your expert
how current calculations will affect the value of your estate.
Another potential benefit of the QPRT is that if the parent
runs into trouble with high hospital or medical bills, the
hospital cannot demand any money gained by refinancing or
selling the house, since the occupant does not have any right to
that money.
If the rough real estate market has devalued your home at
least a little, chances are that the market may rebound sometime
during the term of the trust and if you outlast the trust at its
expiration, the strategy may work out very well for your heirs.
Obviously there are a number of considerations here, not the
least of which involves the current value of the property. Your
adviser should help you consider all these issues, and you
should keep an eye on the news for what eventually happens with
the capital gains tax as well as what ends up happening with the
estate tax.
Oh, and if the parent outlives the trust, the parent can
continue to live in the house by paying the kids fair-market
rent. There's one more wrinkle to try if the kids want to avoid
income taxes on the rent they'll receive from their parents —
they
can form a grantor trust for the property so the rent is paid to
the trust.
March 2009 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
|
