Q: I enjoyed your recent article regarding how to protect your liquid assets by advance estate planning. My question to you is can you recommend an estate planning tool that will ensure that my family residence will pass on to my family heirs and survivors while at the same time minimizing my taxable estate for estate tax purposes?
Tom Garrison, Jarrettsville
A: A currently popular estate planning tool employed by many estate planning professionals is the "qualified personal residence trust" or QPRT. A QPRT would allow the taxable value of a family residence or vacation home to be reduced below its actual value before any estate tax is assessed against it.
For example, let's assume you are 60 years old and have begun your estate planning, including drafting the appropriate wills and trusts, if needed. The next step is to make lifetime gifts in order to minimize the appreciation of your estate. Let's also assume you have a vacation home that you wish to keep in the family and that its value is likely to appreciate.
If the home is worth $400,000 and you give it outright to your children, you would be using a substantial portion of the gift and estate tax "exemption equivalent" of $600,000. You could, instead, give the vacation home to a QPRT and reserve the right to use the home for a term of years, let's say fifteen. The taxable value of the gift would be approximately $110,000 thereby preserving $290,000 of your exemption equivalent.
This type of plan works because you specifically retain the legal right to use the home. The value of your retained right is an actuarially determined amount. Using today's interest rates, that value is over 70% of the total value of the home. You have given away the remainder value, which is less than 30% of the total. The longer the retained right to use the home, the lower the value of the gift. The higher the prevailing interest rate, the lower the value of the gift.
As long as the property is a qualified personal residence, this plan is appropriate.
At the term's end, the home can be transferred outright to your beneficiaries.
A word to the wise: Utilizing the QPRT involves compliance with highly technical provisions of the tax code.
Consult with a qualified tax adviser to ensure that your interests and those of your family are well protected.