Advanced Estate Tax Planning
When you die, owning a home, its value will be included in your estate for estate tax purposes. If you are willing to part with ownership of your home, you can transfer your home into a Qualified Personal Residence Trust (QPRT) for your children in order to keep the future appreciation of the home out of your estate for estate tax purposes.
In general, after you transfer the home to the QPRT, you will be treated as owning the home for a specified period of time (which would need to be determined based on the estate tax planning being done for you). During this time frame, you can live in the home rent-free and you will be entitled to deduct the property taxes. At the end of the time period, the home will be treated as being owned by the QPRT. You will then have to pay fair rental value to live in the home and you will not be entitled to deduct the property taxes.
Your payment of rent to live in the home should be viewed as another way of your transferring money to your children and decreasing the value of your taxable estate. The rent does not apply against the annual gifts you can make to your children, which is a big benefit.
As an example, if your home is currently worth $1 Million, a transfer can be made into two QPRTs and show the value of the house at a lesser amount, e.g., $800,000, because of discounting. Because of the way the QPRT is structured, the value of the home, for transfer tax purposes, might only be $400,000. Right away, you will have transferred a $1 Million asset at a transfer cost of $400,000 thereby transferring $600,000 of the value to your children with no tax impact. If your home increases in value to $1.8 Million by the time you die, the $800,000 increase in value will also not be subject to estate taxes.
Advanced Estate Tax Planning
When you die and leave assets to a child, those assets will be includable in your child’s estate for determining whether or not there will be estate taxes when your child dies.
If you place assets in a trust for a child, whatever assets are left in the trust at your child’s death which pass to his or her children (i.e., your grandchildren) could be subject to a Generation-Skipping Tax (GST). The GST can be higher than the estate tax which might otherwise have been owed at your child’s death.
The government allows you to place a specified dollar amount of assets (known as the GST Exemption Amount) into a trust (known as a Generation-Skipping Tax Trust) for your child’s benefit during his or her lifetime. Whatever remains in the trust when your child dies will pass GST free to his or her children.
In general, the GST Exemption Amount is $5.34 Million in 2014 and will be increased each year according to inflation.
For example, assume you die in 2014 and place $1 Million in a Generation-Skipping Tax Trust for a child. When the child dies, if the assets in the trust are worth $7 Million, the entire $7 Million will pass estate tax free and GST free to your grandchildren.
GST planning can be combined with other planning, such as the use of the Heritage Trust, Irrevocable Life Insurance Trust and Sales to Intentionally Defective Grantor Trust.