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Asset Protection Planning: QPRTs

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Qualified Personal Residence Trust

Introduction

qprtIt’s natural for us to want to hold onto our valued assets, especially our home. The thought of gifting our home away while we are alive can be an uncomfortable one for many clients. Gifting a home to a Qualified Personal Residence Trust (a “QPRT”), however, can be a key tax planning device used in the scheme of a larger overall estate plan. A QPRT is an effective way to maximize estate and gift tax savings while ensuring that your home passes to your beneficiaries in a way that is in line with your estate plan. In this piece, we will briefly outline the key basics of a QPRT.

What is a QPRT?

A QPRT is a trust designed to be used as a gifting device that allows a homeowner donor to gift a personal residence at a discounted value, minimizing the amount of gift tax exemption used. A QPRT has a term of years that the donor pre-selects. The donor is the beneficiary of the QPRT and can live in the home rent-free during the term. The donor continues to be responsible for all real estate taxes, insurance, and maintenance and repair expenses for the residence during the term. The donor must survive the term in order to realize the tax benefits. If the donor does not survive the term, the gift is effectively undone and the value of the home is estate taxed in the donor’s estate at its date of death value (versus its discounted value at the time of the gift). The longer the term the donor must survive, the bigger the discount and the more exemption saved. However, it is equally important to select an appropriate term of years that the donor is expected to outlive.

Tax Benefits and Illustration

Currently, the combined federal gift and estate tax exemption amount is $5.43 million per person. The current federal gift and estate tax rate above the $5.43 million exemption amount is 40%. The Massachusetts estate tax exemption amount is $1 million per person (there is no Massachusetts gift tax), with a top Massachusetts estate tax rate of 16%. Consequently, clients with assets exceeding $1 million at death could end up leaving their beneficiaries with a big estate tax bill. A QPRT can be useful when assets are expected to appreciate and to exceed one or both exemptions. A QPRT effectively freezes the value of the home at the time of the gift (thereby eliminating any estate tax on the appreciation on the value of the home between the time of the gift and the time of death). In addition, the minimum gift tax exemption is used at the time of the gift because of the discount given for the donor having to survive the QPRT term. The discount is calculated under IRS tables based on a number of factors including the donor’s life expectancy, interest rates in effect at the time of the gift, and the length of the term.

 

Pages: 1 2

Asset Protection Planning: QPRTs

pdf-iconPrint Article

Qualified Personal Residence Trust

Introduction

qprtIt’s natural for us to want to hold onto our valued assets, especially our home. The thought of gifting our home away while we are alive can be an uncomfortable one for many clients. Gifting a home to a Qualified Personal Residence Trust (a “QPRT”), however, can be a key tax planning device used in the scheme of a larger overall estate plan. A QPRT is an effective way to maximize estate and gift tax savings while ensuring that your home passes to your beneficiaries in a way that is in line with your estate plan. In this piece, we will briefly outline the key basics of a QPRT.

What is a QPRT?

A QPRT is a trust designed to be used as a gifting device that allows a homeowner donor to gift a personal residence at a discounted value, minimizing the amount of gift tax exemption used. A QPRT has a term of years that the donor pre-selects. The donor is the beneficiary of the QPRT and can live in the home rent-free during the term. The donor continues to be responsible for all real estate taxes, insurance, and maintenance and repair expenses for the residence during the term. The donor must survive the term in order to realize the tax benefits. If the donor does not survive the term, the gift is effectively undone and the value of the home is estate taxed in the donor’s estate at its date of death value (versus its discounted value at the time of the gift). The longer the term the donor must survive, the bigger the discount and the more exemption saved. However, it is equally important to select an appropriate term of years that the donor is expected to outlive.

Tax Benefits and Illustration

Currently, the combined federal gift and estate tax exemption amount is $5.43 million per person. The current federal gift and estate tax rate above the $5.43 million exemption amount is 40%. The Massachusetts estate tax exemption amount is $1 million per person (there is no Massachusetts gift tax), with a top Massachusetts estate tax rate of 16%. Consequently, clients with assets exceeding $1 million at death could end up leaving their beneficiaries with a big estate tax bill. A QPRT can be useful when assets are expected to appreciate and to exceed one or both exemptions. A QPRT effectively freezes the value of the home at the time of the gift (thereby eliminating any estate tax on the appreciation on the value of the home between the time of the gift and the time of death). In addition, the minimum gift tax exemption is used at the time of the gift because of the discount given for the donor having to survive the QPRT term. The discount is calculated under IRS tables based on a number of factors including the donor’s life expectancy, interest rates in effect at the time of the gift, and the length of the term.

 

Pages: 1 2

Asset Protection Planning: QPRTs

pdf-iconPrint Article

Qualified Personal Residence Trust

Introduction

qprtIt’s natural for us to want to hold onto our valued assets, especially our home. The thought of gifting our home away while we are alive can be an uncomfortable one for many clients. Gifting a home to a Qualified Personal Residence Trust (a “QPRT”), however, can be a key tax planning device used in the scheme of a larger overall estate plan. A QPRT is an effective way to maximize estate and gift tax savings while ensuring that your home passes to your beneficiaries in a way that is in line with your estate plan. In this piece, we will briefly outline the key basics of a QPRT.

What is a QPRT?

A QPRT is a trust designed to be used as a gifting device that allows a homeowner donor to gift a personal residence at a discounted value, minimizing the amount of gift tax exemption used. A QPRT has a term of years that the donor pre-selects. The donor is the beneficiary of the QPRT and can live in the home rent-free during the term. The donor continues to be responsible for all real estate taxes, insurance, and maintenance and repair expenses for the residence during the term. The donor must survive the term in order to realize the tax benefits. If the donor does not survive the term, the gift is effectively undone and the value of the home is estate taxed in the donor’s estate at its date of death value (versus its discounted value at the time of the gift). The longer the term the donor must survive, the bigger the discount and the more exemption saved. However, it is equally important to select an appropriate term of years that the donor is expected to outlive.

Tax Benefits and Illustration

Currently, the combined federal gift and estate tax exemption amount is $5.43 million per person. The current federal gift and estate tax rate above the $5.43 million exemption amount is 40%. The Massachusetts estate tax exemption amount is $1 million per person (there is no Massachusetts gift tax), with a top Massachusetts estate tax rate of 16%. Consequently, clients with assets exceeding $1 million at death could end up leaving their beneficiaries with a big estate tax bill. A QPRT can be useful when assets are expected to appreciate and to exceed one or both exemptions. A QPRT effectively freezes the value of the home at the time of the gift (thereby eliminating any estate tax on the appreciation on the value of the home between the time of the gift and the time of death). In addition, the minimum gift tax exemption is used at the time of the gift because of the discount given for the donor having to survive the QPRT term. The discount is calculated under IRS tables based on a number of factors including the donor’s life expectancy, interest rates in effect at the time of the gift, and the length of the term.

 

Pages: 1 2

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