To remove your email from the subscriber's list, please follow the instructions on the email.

The Tax Prophet Newsletter   Issue # 33 April, 2006

REDUCE TAXES!
CHECK OUT THE TAX PROPHET'S Action Guides


In This Issue:
Introduction
QPRT
The Gamble
Example
Conclusion


Qualified Personal
Residence Trust


Introduction

Interested in passing down the family residence to the next generation without incurring an estate tax on the property, while retaining the right to live in the property for the next 10 years?

If so, then consider placing the residence, or a vacation home for that matter, into a qualified personal residence trust (QPRT).


QPRT

A QPRT is a special trust allowing the owners to gift the remainder interest in their primary or secondary residence to their designated beneficiaries. For a property worth $1.5 million, the remainder interest could be approximately $870,000 ten years later (the calculation depends on the interest rates at the time of the gift).

This means that an owner can set up a QPRT and retain the right to live in the property for ten years by incurring a gift-tax liability based on a gift of $870,000. With the gift-tax exemption now equal to $1.0 million of assets ($2.0 million for a married couple), it may make financial sense to use a portion of the exemption in this manner.

Note: As interest rates rise, the remainder interest decreases. Also, if the owner's right to live in the property increases from 10 to 20 years, the remainder interest decreases to approximately $504,000.


The Gamble

Of course, there is a catch: The owner must outlive the term of the trust for the QPRT to work. If this happens, the residence escapes estate taxes, even if it skyrockets in value over the term of the trust.

If the QPRT is successful, the basis in the property is carried over from the owners to the beneficiaries, which means that all the appreciation in the property will be taxed at capital gains rates if the property is sold.

The downside: If the owner dies before the term of the trust expires, the residence is valued on the date of death, as though the QPRT never existed.


Example

Assume the property was purchased by the parents for $100,000 and there was an additional $100,000 of improvements made on the property. The parents' basis in the property would be $200,000.

When the property was worth $1,000,000, the parents transferred the property to a QPRT and used their gift tax exemption to eliminate the gift tax on the transfer. When the beneficiaries receive the property, assume it is worth $3,000,000.

Although the property escapes estate taxes, the basis in the hands of the beneficiaries is $200,000 and a later sale of the property for $3,000,000 will result in a taxable gain of $2,800,000.


Conclusion

A QPRT should be considered when there is a residence worth several million dollars and the owners want the property to stay in the family.

Because of the potential adverse income tax consequences, it may be advantageous to transfer property to a QPRT after one parent dies because the property's basis is revalued upon the death of a spouse. See the Basics of Estate Taxation - Basis in Assets.



Home | Who We Are | What's New | Search | Contact Us | Subscribe

| [Tax Class] | [Hot Topics] | [Estate Planning] | [Employee Stock Options] | [Tax & Trust Scams] | [Foreign Taxes] | [Tax Columns] | [Tax Publications] | [Tax Hound] | [Interactive Apps] | [Cyber Surfing] |
All contents copyright © 1995-2006 Robert L. Sommers, attorney-at-law. All rights reserved. This newsletter provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet® is a registered trademark of Robert L. Sommers.