Estate and Charitable Planning For The Family Home

Clients who are charitably inclined could consider a charitable bequest, which would allow them to continue to live in the home until they die and bequeath the home to charity via their will. A bequest enables them to continue control the home during life. The technique also removes the value of the home from the taxable estate.

When structured properly, a bequest at death will qualify for the estate tax charitable deduction, thus reducing the taxable estate. The drawback is that the home passes to charity and not to heirs. This strategy is more effective where the children would be likely to sell the home rather than use it. If the clients are concerned about reducing their heir’s inheritance because of the charitable bequest, life insurance could be used to “replace” the value of the home.

Qualified Personal Residence Trust

With a qualified personal residence trust or QPRT, the client transfers ownership of the home to a trust while alive, but retains the right to live in the home for a period of time. This is an irrevocable transfer and is subject to gift taxes. However, the gift tax value is reduced because the client has retained the right to continue living in the home during the term of the trust.

The gift value of the home is based on the term length and an IRS assumed discount rate (the IRC 7520 rate). For example, if a 65-year-old transferred a $500,000 home to a 10-year QPRT (assuming the March 2009 IRC 7520 rate of 2.4%), the gift tax value is $299,840. An additional benefit is that future appreciation of the home will be outside the taxable estate. This can be particularly attractive given the recent decline in home values.

There are drawbacks to the QPRT, however. If the client dies while living in the home during the term of the QPRT, the home is included in their estate. Therefore, the client needs to outlive the terms of the trust. Another issue is that once the trust term ends, the client cannot live in the home without paying fair market rent. So, the QPRT is typically recommended for those situations where the client has a second home to live in or plans to move out of the home in the future.

Charitable life estate

Instead of giving the home to charity at death, a client can transfer the title to the home to charity while alive and continue living in the home until death. This “charitable life estate” has many benefits including: an immediate income tax deduction for the remainder value that will pass to charity; the ability to live in the home until death; and removal of the home from the estate.

Because the charity must wait until death to receive the home, the charitable deduction is not for the full value of the home. A calculation similar to that of the QPRT is done to determine the charitable deduction of the life estate. The life estate may be an attractive technique for those considering a bequest at death but could use an income tax deduction today.

Summary

Legacy planning for the family home can be difficult and carries both financial and emotional issues. However, there are strategies that can be used to meet the client’s objectives. Financial advisors need to be familiar with the all the options and help their clients evaluate which strategies best meet their needs.

Jim Allen, CFP, CLU, ChFC is Director of Advanced Sales for the MetLife Life and Protection Solutions Group. He is located in Irvine, CA and be reached at [email protected]