• 21
  • March
    2011

If you are an older homeowner, now is turning out to be a good time to transfer ownership of your home to your heirs by using a special trust that is designed to save money on estate and gift taxes.

The device is known as a "qualified personal residence trust," or QPRT. Using this trust, you can go on living in your house for years, then later transfer ownership to your heirs at a discount to the current market value. The advantage is that the property will be valued now, when housing values are at all-time lows. There is also a temporary increase in the gift tax exemption that can be taken advantage of right now: the exemption is up to $5 million from $1 million for individuals, and $10 million from $2 million for couples.

The $1 million exemption made it difficult for many people to transfer a home without gift tax consequences. The new exemption gives people a lot more room to work with.

Using the QPRT, people can also move a big asset out of their estate at just a fraction of its future value.

QPRTs tend to work best for people whose net worth is above the current estate tax exemption: $5 million. They could also be a good idea for people whose estates could grow to be above $5 million, or who might be stuck with a lower exemption rate, such as the $1 million the law is set to return to in 2013, or such as $3.5 million, the Obama administration's proposed exemption for 2012.

What are the risks of QPRTs? They are most useful for homes that are expected to stay in the family. If the heirs turn around and sell, they could face substantial capital gains taxes. (Although currently, capital gains are taxed at 15%, well below the estate tax rate of 35%.)

Florida estate planning attorneys point out that another big risk is that you have to give up the home when the trust ends, even if you are still alive. Just to be safe, many homeowners make an agreement to stay in the home and pay rent if the trust ends while they are alive. However, the rent has to be a fair-market rate, and the heirs will owe tax on the income from the rent.

Source: Wall Street Journal "A Matter of Trust: Giving Away a Home" 3/19/2011