Friday, October 22, 2010

QPRTs in Estate Planning


Yesterday's New York Times had a special section called "Wealth" focusing on financial planning and management.

One of the articles - written by Deborah Jacobs, author of very useful Estate Planning Smarts - had several good tips, I thought, about how to effectively pass your primary home to your heirs.

First, a general comment about the section. Most of the articles dealt not with "get rich quickly" thoughts that seemed to dominate the financial press a few years ago. This reflects the mood of most clients I speak to these days: wealth preservation, and not outliving your savings, is the #1 topic.

QPRT's are a popular way to leave one's primary residence to your heirs. Here's what the article had to say:

CREATE A QPRT With the Qualified Personal Residence Trust, known as a QPRT (pronounced CUE-pert), you put your primary residence or vacation home into an irrevocable trust, retaining the right to live there rent-free for a specified number of years. During that period, the trust, of which you could be trustee, owns the property. If you survive the preset period — a condition for this technique to work— ownership can then pass to the beneficiaries, usually children, or go into another trust, often called a dropdown trust, for the rest of your life (you would then need to pay rent if you want to live there).

The taxable gift with a QPRT reflects the value of the right to acquire the personal residence a certain number of years from when it is set up, discounted by the probability that the person setting up the trust will live that long. Figuring the discount involves a complex actuarial calculation based on the Section 7520 rate set each month by the Internal Revenue Service. The higher the rate and the longer the term, the bigger the discount and the more savings associated with the QPRT, said Mr. Katzenstein, whose Tiger Tables Actuarial Software (www.tigertables.com) does such computations.

Leave the Children the House, Without a Big Tax Bill - NYTimes.com

The first paragraph from the article brings up a point that a lot of people don't think about when they set up a QPRT. Namely, once the preset period ends, you have to pay market rents in order to continue to live in your own house.

I have couple of savvy (and very healthy) clients who set up QPRTs years ago whose preset terms have ended. They are now trying to figure out the best way to pay market rents to their children, or else face the loss of a very effective estate planning tool.

Their children are uncomfortable with taking money from their parents to live in their own homes, but unless the estate lawyers can come up with some creative techniques my clients will have no choice.