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Many people incorrectly assume that their estates will escape federal
estate tax as a result of underestimating what their principal residence
will be worth when they die. Often, our homes are our most valuable
assets. The "Qualified Personal Residence Trust" (QPRT)
provides a means for significantly reducing the estate tax consequences
of the family home and one vacation home. The QPRT also provides
an excellent asset protection vehicle since you no longer own the
property once the trust is established. In fact, no one owns it.
An individual creates a QPRT by transferring his residence and/or
vacation home to an irrevocable trust (usually for the benefit of
family members) but retaining the right to use the residence rent-free
for a specified period of time. The tax savings occur only if the
grantor of the trust survives the period of his retained interest.
Upon the transfer of the residence to the trust, the grantor is
regarded as making a present gift of only the "remainder"
interest in the trust. The attractiveness of the QPRT results from
the favorable gift tax valuation rules that apply to remainder interests.
This value as determined by the IRS's actuarial tables is the fair
market value of the residence (less its mortgage) less the actuarial
value of the term of years' interest retained by the trust maker.
If a trust other than a QPRT were used, the total value of the residence
would be subject to tax, but with the QPRT, since there is a life
estate attached to it, only the remainder interest is valued. This
means a far lower value for estate tax purposes.
The calculations involved in determining the valuation of the gift
are complex. A very, very rough rule of thumb is that is that if
the trust term is five years, the value of the gift is about 75%
of the value of the property with the gift tax about 40% of that.
At ten years, the value of the gift would be closer to 50% of the
present value, and the gift tax would be about 40% of that. Again,
roughly speaking, a five-year use term shifts about 25% of value
to the life estate and away from the remainder value.
Although the grantor must survive the period of his retained interest
in order for the tax savings to be achieved, there is no gamble
involved. If he or she fails to survive the retained interest period,
the full value of the residence will be taxed, but that is the same
valuation if the residence had never been transferred to the QPRT.
There is no penalty. Also, the grantor may continue to occupy the
residence once he has survived the retained interest period, but
he must pay rent in order to avoid inclusion of the residence in
his estate.
In our simplified asset protection plan, with exceptions, your
safe assets are transferred to a family limited partnership, your
home and/or vacation home are transferred to a Qualified Personal
Residence Trust, your business is transferred to an LLC or S Corp.
(depending on the type of business); rental or commercial real estate
is transferred to an LLC; and the remainder of the assets go to
the Family Limited Partnership. All interests in these entities
are held by your Living Trust.
What assets go in the QPRT
Advantages of the QPRT
Disadvantages of the QPRT
The Qualified Personal Residence
Trust is Irrevocable
How long should the QPRT term be?
Effect on Property Taxes and Transfer
Tax
An example of estate tax with a QPRT
Valuation of the QPRT
Our Asset Segregation Estate
Plans & Fees
Fees for a stand-alone QPRT
What you do after we set up your trust
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