Estate Planning & Qualified Personal Residence Trusts

Home ownership has traditionally been the foundational wealth building vehicle for many people in the United States, so the value of the family home makes up a large percentage of the total worth of many estates. The federal estate tax has been repealed for this year, but it returns in 2011 with a $1 million exemption and a maximum rate of 55%. When you apply this rate of taxation to the market value of a house that is being willed to your heirs it is devastating to the value of the estate, and many feel that it is an instance of double taxation. You bought the house with the net income that you earned over the years after paying taxes on the gross, and then this net income that has been invested in your home is taxed once again at an exorbitant rate upon your death.

 

Fortunately there is an estate planning vehicle called a qualified personal residence trust that can provide a way to avoid paying estate tax. To implement this strategy you place your house in the trust and name your beneficiaries. You may then continue to reside in the house for a specified period of time rent-free, but you are responsible for ongoing maintenance costs and property taxes. At the end of this prescribed term your beneficiaries assume ownership of the home and the estate tax is not applicable.

 

The funding of the trust with the home is considered to be a gift to the trust and it is subject to the federal gift tax, but the value of the gift is based on the actuarial value of the house, which will be much less than its true market value. There is a $1 million gift tax exemption, so if it has not been used, the transfer of ownership is achieved tax-free as long as the actuary value is less than a million dollars.

 

QPRTs are very effective and commonly used estate planning vehicles, and if your home makes up a large portion of your estate’s value such a trust may be the ideal good solution for you.