Saturday, September
4 2010
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Saturday, September
4 2010
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Announcing a new acquisition!!
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What's New at Forte for the year 2009 May 2009 The Death Tax Is Likely To Live On, So High-Net Worth Individuals Might Consider a Qualified Personal Residence Trust By Forte News Department 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 David W. Henion , a local member of FPA. | ||||||||||||||
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