For people who have an estate tax problem and a large portion of their estate is their personal residence, a Qualified Personal Residence Trust (“QPRT”) should be considered.
If your resources are at a particular level you have to concern yourself with the ravages of the estate tax. This federal estate tax is currently carrying a maximum rate of 35%, but it is scheduled to rise to 55% at the end of 2012.
Whether or not you have to pay estate taxes depends upon the overall value of your assets in relation to the estate tax exclusion that exists at the time of your death. This exclusion is $5 million right now, but it will be reduced to $1 million in 2013 if the current laws remain in place.
Many people would be able to stay within the estate tax exclusion if they were to reduce the taxable value of their homes. This can be done through the creation of a QPRT. The concept of the QPRT was created by the IRS as part of the valuation regulations issued twenty years ago and in the hands of an accomplished estate planning attorney is a highly effective means by which the value of the taxpayer’s residence can be artificially reduced. This is achieved by the use of a combination of valuation discounting techniques and actuarial values.
The way that it works is you place your home into the trust and name beneficiaries who will assume ownership of the property after the trust term expires. You determine a period of time during which you will continue living in the home when you are drawing up the trust.
By continuing to live in the home you are retaining interest in the property. So although the act of funding the trust is considered to be a taxable gift, the taxable value of the gift is reduced by the interest that you retain in the home. This value will be significantly less than its true fair market value and this is where the tax savings are realized.
To read more about QPRT’s, revisit this blog: QPRT’s 2010 Blog. If you think a QPRT might be right for you, it is essential that you consult with an experienced estate planning attorney.
Roy has an undergraduate degree in accounting from Indiana State University, and a Juris Doctor degree from Indiana University. He graduated from law school in 1973. Roy was a member of the legal fraternity of Phi Delta Phi and president of the local chapter at Indiana University Law School in 1972-73. In law school he was a recipient of the Dean Faust Award and received awards and honors in income taxation and estate and gift taxation.