With an estate and gift tax exemption of just over $5 million due to expire at the end of 2012, high-net-worth individuals are looking to leverage the opportunity with creative asset transfer strategies. The Qualified Personal Residence Trust (QPRT) is a tool individuals should consider, due to its ability to:
A QPRT is an irrevocable grantor trust created by an individual. While a QPRT allows an individual to retain the use of his or her home and take advantage of the exemption, a QPRT is truly created for the benefit of future beneficiaries. The grantor transfers a primary or secondary residence to the trust and retains the right to use the residence for a number of years, the term, as determined by the grantor. At the end of the term, the residence will pass to the named beneficiary.
In effect, the retained right to use the property reduces the current value of the gift. For example, at age 60, an individual transfers to a QPRT a residence with a fair market value of $1 million, with a term of 10 years, and a Federal rate of 1%. The value of the gift would be $772,990. The future value of the residence in 20 years (approximate life expectancy for 60 year-old) at 3% annual growth would equal $1,806,111; and the potential estate tax savings at 50% estate tax rate would equal $516,560.
Following are a few of the important issues that someone considering a QPRT transaction must consider:
The decision to create a QPRT requires balancing the potential estate tax savings against the consequences of relinquishing ownership to the next generation, and the strategy should be considered in combination with a comprehensive estate and financial plan. Nevertheless, when appropriate, a QPRT can be an extremely effective tool in transferring wealth to the next generation estate tax free.
For more information, contact Alane Boffa at aboffa@cohencpa.com or a member of your service team.
This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.
Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.