In San Diego, many persons use their San Diego home as both a retirement and a tax savings. Per the disclaimer below, this firm does not give tax advice however is it common knowledge that interest on a prinicipal residence can be used as an advantage for tax deductions. The Qualified Personal Residence Trust also can have tax advantages however in a different manner.
Many people’s assumption that their estates will escape federal estate tax may be incorrect because they often underestimate the worth of the most valuable asset that they own, their personal residence. Federal estate tax law provides a means for reducing the tax consequences of transferring the family home. The device that is used to accomplish this goal is known as a “qualified personal residence trust” (QPRT). A combination of an experienced estate planning attorney and certified public accountant are a necessity in the preparation and implementation of this advanced estate planning strategy.
An individual creates a QPRT by transferring his residence to a trust (usually for the benefit of family members) but retaining the right to use the residence rent-free for a specified period of time. The tax savings occur only if the grantor of the trust survives the period of his retained interest. Again, this firm does not give tax advice.
Upon the transfer of the residence to the trust, the grantor is regarded as making a gift of the remainder interest in the trust. The value of the gift is the fair market value of the residence less the value of the grantor’s retained interest. The gift is taxable, but only to the extent of the remainder interest, and there will be no further tax on the residence at the grantor’s death. If a trust other than a QPRT were used, the total value of the residence would be subject to tax, just as it would be if the residence were transferred by will.
Although the grantor must survive the period of his retained interest in order for the tax savings to be achieved, there is no gamble involved. If he fails to survive his retained interest period, the full value of the residence will be taxed, but that is the same result that would be reached if he never transferred the residence to a QPRT. Also, the grantor may continue to occupy the residence once he has survived the retained interest period, but he must pay rent in order to avoid inclusion of the residence in his estate. Please feel free to e mail us if you have any questions on this estate planning strategy or on any other.