Like many of you, summer is my favorite time of the year. In my adopted home of New England, nothing is more glorious than a warm summer day on Cape Cod. Beautiful sandy beaches, clam bakes, and a cool breeze blowing in from the Atlantic Ocean create the backdrop for a leisurely holiday that allows a visitor to forget nearly all the stress of his or her usual day-to-day life.
One evening, while my son and I were walking along the beach just before sunset, I came upon a gentleman digging clams. Among the things that I learned while talking to him was that he owned the stunning antique home not far from where we were talking. He told me that his home had once been a lighthouse and that he had purchased it as a vacation home over 40 years ago when his children were still in school. He smiled as he told me that some of his best memories are of his children, and later his grandchildren, playing on this very beach. Before I left, he also gave me his “secret” recipe for stuffed clams. For those of you not from New England, take my word for it–there is nothing better than sitting at a picnic table on a cool summer evening eating stuffed clams, chowder, and fresh lobster. To say the least, Im grateful to this gentleman for sharing his familys stuffed clam recipe with me.
After I finished talking to this gentleman, I continued my walk along the beach. And, for one of the few times during my vacation, I suddenly remembered that I am an estate-planning attorney. And, as such, I couldnt help wondering to myself if this charming man had taken the necessary steps to ensure that his vacation home remains in his family after his death. If I were his child or grandchild, I wouldnt be able to stand the thought of selling this family treasure.
The more I thought about him and his beautiful vacation home, I realized that his problem is not isolated. In fact, his problem is very common. As I stood on the beach and looked up at the majestic summer homes that look down upon ocean, I couldnt help wondering–have the people who own these fabulous pieces of property taken the proper steps to ensure that their children and grandchildren will always be able to enjoy these views?
And, more importantly, this isnt just a New England matter. Think about your favorite vacation spot. Have the people who own vacation homes in those locations done the proper planning to ensure that their homes remain in their families?
Based upon my experiences, the answer is often no. And, unlike many estate-planning problems facing your wealthy clients, preservation of a familys vacation home is not a complicated matter. In this article, Ill discuss just how easy it can be to protect a familys vacation home through the use of a qualified personal residence trust. A QPRT is one of the most effective estate planning tools available. Yet, despite the simplicity and effectiveness of QPRTs, they are too infrequently used.
What is a QPRT? It is an irrevocable trust in which the grantor (i.e., the creator of the trust) retains an interest in the personal residence for a period of years. At the end of the retained interest, the personal residence passes to the beneficiaries named in the trust. These beneficiaries are ordinarily the children of the grantor.
What is the benefit of a QPRT? By transferring a personal residence to a QPRT, the owner of the residence can get the property out of his or her estate for federal estate tax purposes. However, because the property does not transfer to the trust beneficiaries until the end of the retained period, the value of the gift may be significantly less than the entire fair market value of the property.
Sure, it sounds complicated. But it really isnt. The best way to understand how a QPRT works is to look at an example. Lets take the gentleman that I talked to on Cape Cod. While I dont really know much about this man, lets pretend that we know a few more facts than I really know.
The gentlemans name is Zachary Alexander. He is 75 years old and widowed. Prior to retirement, he was a successful businessman and he has been very savvy with his investments since retirement. Currently, his net worth is $10 million. His assets include his primary residence in Newton, Mass., and his vacation home overlooking the ocean in Wellfleet, Mass. His home in Newton was recently valued at $1.5 million. His vacation home has a value of about $1 million.
The rest of his estate consists primarily of illiquid stock in the family-owned business. As part of Mr. Alexanders estate plan, he could create (as can any individual) two QPRTs–one for his primary residence and one for his vacation home.
Without any additional planning, Ill demonstrate how the creation of two QPRTs will significantly reduce Mr. Alexanders estate tax exposure and reduce the risk that his family may need to sell the vacation home to pay estate taxes. Of course, creation of the QPRTs would really be only part of a comprehensive estate plan for Mr. Alexander, but for the sake of simplicity this article will focus on the QPRT created to hold the vacation home.