If you have a principle residence or vacation home, an excellent opportunity to substantially reduce potential estate tax liability is through the use of an estate planning tool “The Qualified Personal Residence Trust.”
If you have a principle residence or vacation home, an excellent opportunity to substantially reduce potential estate tax liability is through the use of an estate planning tool “The Qualified Personal Residence Trust.” Through the use of a QPRT, the IRS permits a homeowner to make a tremendously discounted gift of their residence to their children, while still retaining the long-term use of the property.
Quite often, a residence or vacation home constitutes a significant portion of an estate. At the time of death, the value of the property is included in estate just like any other asset. As of January 1, 2015, an individual may leave a maximum of $5,430,000.00, if single, or $10,860,000.00, if married, to his or her children before an estate tax is imposed. This figure is known as the applicable exclusion amount. Your goal should be to utilize the exclusion amount as efficiently as possible or your estate may ultimately be subject to a tax rate of up to 50%.
The QPRT provides an excellent opportunity to gift a principle residence or vacation home to children while retaining the full right to use the home for a specified number of years. When the trust term selected by you expires, the home passes on to your children or other named beneficiaries. The tax bite is reduced substantially as only the value of your future gift to children is computed for tax purposes.
For instance, if you are 65 years old and transfer a million dollar home into a QPRT, for a 15 year term, under the present discounting tables, the value of the property is reduced to $269,000.00. More importantly, the value of your property in 15 years will most likely increase substantially. As a result, instead of being taxed on perhaps two million dollars your estate will only be taxed on $269,000.00, thereby avoiding estate tax on $1,731,000 under this example.
The only draw back with QPRT, is that donor must survive the full length of the term (in this instance 15 years). If the donor passes away during this term, the home is transferred back into the donor’s estate, and the value of the home is subsequently reported at its true value.
During the term of the QPRT, an individual can retain the Florida Homestead Exemption as well as claim an income tax deduction for real estate taxes and mortgage payments. Furthermore, if a primary residence is used an individual can still retain the appropriate capital gain exclusion if the house is sold during this term. At the end of the term in exchange for paying taxes, maintenance and insurance, the donor can continue to live in the home indefinitely.