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- Health Insurance: Health and Medical Savings Accounts A Health Savings Account is a trust created exclusively for the purpose of paying qualified medical expenses of an account beneficiary. Although they are popular, they are not without their pitfalls and the regulations can be complicated. Learn more about how to avoid federal taxation on the accumulation and distributions of HSA.
This is the sixth in a series of 23 tax tips that AdvisorOne will publish on each business day in March as part of our Tax Planning Special Report (see our Special Report calendar for a more complete list of topics to be covered and experts who will deliver their insights).
The tax tip today comes from Benjamin Ledyard, director of Wealth Strategies and regional director of the Mid-Atlantic for Silver Bridge Advisors. During his 15 years of experience in wealth management, he has developed expertise in financial, tax, wealth transfer, risk management, investment oversight, family governance, business succession, executive benefits and philanthropic planning.Ledyard holds a JD from Widener University School of Law and a bachelor’s degree from the University of Delaware.
The Tip: Consider Transferring a Residence to a QPRT
Effective Jan. 1, The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the Act), provides a wonderful opportunity for families and individuals to transfer wealth. But it’s scheduled to sunset at the end of 2012, so the time for action is now. The Act’s 500% increase in the gift tax exemption, for $1 million to $5 million, opens the window for more sophisticated transfer strategies, especially for wealthier families and individuals, according to Ledyard (left).
Now is a good time to look at the qualified personal residence trust (QPRT), Ledyard says. This is an irrevocable trust funded by the homeowner’s interest in the residence. The homeowner transfers the house’s title to the trustee of the QPRT, but retains the right to live in the house rent free for the term of the trust. At the end of that time, the residence passes to the beneficiaries of the QPRT—typically the homeowner’s children.
The transfer of the title to the QPRT is considered a gift to the beneficiaries of the trust, but its value is reduced by the homeowner’s retained interest in continuing to live in the house rent free during the trust term. And the longer that term, the greater the reduction of the gift tax valuation at transfer.
Any appreciation in the residence’s value after transfer to the QPRT is removed from the homeowner’s taxable estate. The flipside of this shiny coin, however, is life expectancy risk: If the homeowner should die before the end of the QPRT’s term, the house will revert to his or her taxable estate.
The homeowner who survives the term of the trust can no longer live in the residence rent free, but must sign a formal lease and pay market rate rent to the beneficiaries. For some, this can be a further way to transfer wealth free of wealth transfer taxes. The beneficiaries pay tax on the income.
Ledyard says QPRTs became much more attractive on Jan. 1 because the gift uses up only a small portion of the now greatly increased lifetime credit. When that limit was $1 million, a QPRT would eat up much of that credit.
See our Tax Planning Special Report calendar for a list of future topics to be covered.