Home Transfers to Children Can Work for Estate Planning if Done the Right Way

BY ROGER RUSSELL

QPRTs permit a home's transfer to one's children or other beneficiaries at the lowest possible tax cost while the homeowner continues to live in it.

The main reason a client would do a QPRT is if the client has a residence that is a significant part of the estate and expects the home to appreciate at a rapid rate, according to Jeff Call, a tax and personal financial services partner at Atlanta-based Bennett Thrasher.

"The estate tax exemption is currently at $5.43 million, so the home has to be a significant part of the estate or there must be other assets that kick you over that estate exemption level," he said. "The reason it makes sense now is that we are coming out of a fairly poor real estate environment. The best time might have been in 2008 or 2009, but it's still a good time today based on what peoples' expectations of what their home value will be. It's a good time to remove assets from your estate, because they are appreciating rapidly."

Typically, Call's firm suggests a QPRT to a client, runs the numbers, and has an attorney draft the trust document. "You must pick a term of years for how long the trust will last," said Call. "The current owner of the home gets a lifetime interest in the property through the trust to live in, and after that it will go to the beneficiaries, usually kids or grandkids. The IRS determines the value of the lifetime and remainder interests based on the AFR [applicable federal rates], which is what determines the amount of the gift for estate and gift purposes."

"In order to work, the grantor has to outlive the term of the trust. If the grantor doesn't outlive the term, the house gets brought back into the estate as if the transaction didn't take place, so the trick is to pick a term that you think the grantor will outlive," he said. "The shorter the term the less estate planning benefit there is; the greater the term, the greater the discount is. If you have a very short-term trust, you won't get much of a discount against the true value of the home, so you want to pick a term for as long as you think you can potentially outlive. Usually, we see five-, 10- or 15-year terms, depending on the client's age and health conditions."

For example, Call said, for a 60-year old assuming a combined death tax bracket of 40 percent, property transferred to a 10-year QPRT in May 2015 with a value of $1,000,000 and after-tax growth at the rate of 5 percent could generate potential death tax savings of $365,818.

"Once the person who is the grantor outlives the term, if they want to continue to live in house, they would need to pay rent to the trust at an arm's length rental rate," Call noted. "Some clients don't like that idea, but from an estate-planning standpoint it's good, because it allows them to get additional funds out of the taxable estate."