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Financial Planning > Trusts and Estates > Estate Planning

Estate and Charitable Planning For The Family Home

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For many moderate and high net-worth clients, estate planning often focuses on the personal residence or family home. This can be challenging for a couple of reasons. Not only can the home be the biggest asset in the estate, but planning for ultimate disposition of the home often comes with significant emotional issues.

This could be the home in which the parents raised their children, thus holding many memories for the client. Or it could be a vacation home that has been passed down from generation to generation. Because of these considerations, planning surrounding a personal residence cannot be based solely on “numbers.” Additionally, the client should confer with independent tax and legal advisors regarding the planning techniques under consideration, as they will likely have valuable input.

Meeting the objectives

Financial advisors need to include these emotional issues in the discussion about the disposition of the family home and help the client formulate a plan that meets both financial and emotional planning objectives. Often, the client has already “mentally accounted” for the personal residence as the children’s inheritance and is reluctant to sell or move out of the home.

When evaluating disposition of the family home, the planning options can generally be broken down into the following strategies:

? Continue to live in the home and pass the home to heirs at death.

? Continue to live in the home and bequest the home to charity at death.

? Transfer the home to a qualified personal residence trust (QPRT) while alive.

? Transfer the home to charity while alive using a charitable life estate.

Pass the home to heirs at death

With this strategy, clients will own the home until they die and pass it to heirs via their will or living trust. The benefit is that the home will get a stepped up cost basis at death, thereby eliminating any capital gains tax on the increase in home value above cost basis up to the date of death. A potential drawback would be that the home will be included in the estate for purposes of calculating estate tax. For clients who have sizeable estates ($3.5 million for a single person and $7 million for married couple in 2009), the cost of federal estate tax, currently at 45%, needs to be weighed against the potential capital gains savings of the stepped up cost basis. Note: states may impose additional estate taxes as well. These state taxes (and the corresponding exemption levels) vary from state to state.

Pass the home to charity at death

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.


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]


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