Passing Real Estate To The Next Generation. Trusts Part 5

In the first three parts on our series on trusts we discussed Testamentary, Revocable Trusts, Irrevocable Life Insurance Trusts and Special Needs Trusts. This species of trust is much more specific and specialized with an eye towards passing property to the next generation on a tax favorable basis. The unique line up of circumstances we have now with low interest rates and reduced property values make this a very opportune time to consider within a long term estate transfer and wealth management strategy.

The motivation to set up a Qualified Personal Residence Trust is often to keep a “special” property in the family or to transfer the property at less than current market value. It could be a special vacation property that has been used as a family get together place or as a primary residence. Transferring a piece of property such as this can be challenging since the “gift value” is often large and will certainly exceed the annual exclusion amount for estate and gift taxes ($12,000 per person) and still overwhelm the Unified Credit Amount of 1,000,000. There often is also a desire on the part of the person transferring the property to continue to use the property for some period of time. The value of the remaining time is considered a “retained Interest” on the part of the IRS. This retained interest would not be considered part of the gift for gift and estate tax purposes. This is calculated using the Grantor’s age, the term of the trust and the Section 7520 rate published by the IRS. Conceptually the property is discounted by the Sec 7520 rate for the term of the trust to ascertain the value of retaining (Remainder Interest) the property.

As an example let’s assume a couple age 80 establish a QPRT with a water front property. They design a Qualified Personal Residence Trust with a 10 year term with reversion. Using the term and mortality table the present value of the gift for transfer taxes is $424,470 rather than the $1,000,000 property value. Assuming they have not used any of their unified credit already this transfer uses less than half of the available credit and no taxes would be paid. Since this couple is also in the 50% Estate Tax bracket it saves over $500,000 in estate taxes as well.

Of course, there are endless scenarios in considering a vehicle such as this and consulting with your wealth management team is critical to obtaining a favorable result. Future posts on trusts will include Offshore or Asset Protection Trusts and Charitable Trusts. Stay tuned!!