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THE QUALIFIED PERSONAL RESIDENCE
TRUST
If you have a principle residence or vacation
home, an excellent opportunity to substantially reduce potential
estate tax liability is through the use of an estate planning tool
“The Qualified Personal Residence Trust.” Through the use of a QPRT,
the IRS permits a homeowner to make a tremendously discounted gift
of their residence to their children, while still retaining the
long-term use of the property.
Quite often, a residence or vacation home constitutes a significant
portion of an estate. At the time of death, the value of the
property is included in estate just like any other asset. As of
January 1, 2002, an individual may leave a maximum of $1,000,000.00
to his or her children before an estate tax is imposed. This figure
is known as the applicable exclusion amount. Your goal should be to
utilize the exclusion amount as efficiently as possible or your
estate may ultimately be subject to a tax rate of up to 50%.
The QPRT provides an excellent opportunity to gift a principle
residence or vacation home to children while retaining the full
right to use the home for a specified number of years. When the
trust term selected by you expires, the home passes on to your
children or other named beneficiaries. The tax bite is reduced
substantially as only the value of your future gift to children is
computed for tax purposes.
For instance, if you are 65 years old and transfer a million dollar
home into a QPRT, for a 15 year term, under the present discounting
tables, the value of the property is reduced to $269,000.00. More
importantly, the value of your property in 15 years will most likely
increase substantially. As a result, instead of being taxed on
perhaps two million dollars your estate will only be taxed on
$269,000.00, thereby avoiding estate tax on $1,731,000 under this
example.
The only draw back with QPRT, is that donor must survive the full
length of the term (in this instance 15 years). If the donor passes
away during this term, the home is transferred back into the donor’s
estate, and the value of the home is subsequently reported at its
true value.
During the term of the QPRT, an individual can retain the Florida
Homestead Exemption as well as claim an income tax deduction for
real estate taxes and mortgage payments. Furthermore, if a primary
residence is used an individual can still retain the appropriate
capital gain exclusion if the house is sold during this term. At the
end of the term in exchange for paying taxes, maintenance and
insurance, the donor can continue to live in the home indefinitely.
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