In last week’s blog post, we discussed using annual gifts to reduce the size of your taxable estate. Here’s another approach to the same concept of easing the potential tax burden on your beneficiaries….
“While prices fluctuate, over the long run real estate values have always gone up, and there is no reason to think that is going to change,” David Greene once wrote in a Forbes article. In fact, the historical annual average national appreciation rate from 1987 through July 2023 is 4.8%. According to the Indiana Business Review, it has been closer to 5% in Indiana!
It makes sense, therefore, to consider real estate holdings when doing estate and gift planning, with the goal of reducing the tax burden on beneficiaries. One strategy to consider is a Qualified Personal Residence trust or QPRT.
As our Indiana estate planning attorneys explain to clients, a qualified personal residence trust (QPRT) is a specific type of irrevocable trust that allows homeowners to remove the value of their home from their estate for the purpose of reducing the amount of gift tax that is incurred when transferring assets to a beneficiary.
The way the QPRT works is that the owners of the residence can continue living there for a pre-determined period of time. At the end of that time, the ownership of the home transfers to the beneficiaries. The value of the transaction is calculated using the special “AFR”s (applicable federal rates) set by the IRS. The concept is this: since the owner is retaining a fraction of the value of the home, the gift to the beneficiaries will be considered lower than the fair market value of the home at the time of the death of the original owners. For the tax benefit to be work as planned, the trust needs to expire prior to the death of the homeowner.
Certainly no do-it-yourself tactic, a QPRT is just one of many complex trust and estate planning arrangements that can be tailored to fit the needs of clients who want to keep the family home “in the family”, while reducing the future estate tax burden on their heirs.
– by Rebecca W. Geyer
