What Is a Qualified Residence Trust in New York
-
Upload
mark-eghrari -
Category
Law
-
view
117 -
download
0
Transcript of What Is a Qualified Residence Trust in New York
What Is a Qualified Personal Residence Trust? www.myestateplan.com 1
“Since your home may be one of your most valuable assets, this can be a very effective part of your
wealth preservation plan.”
WHAT IS A QUALIFIED PERSONAL RESIDENCE
TRUST IN NEW YORK?
MARK S. EGHRARI NEW YORK ESTATE PLANNING ATTORNEY
What Is a Qualified Personal Residence Trust? www.myestateplan.com 2
The federal estate tax is a looming threat for people who have been able to
accumulate significant wealth.
If you are exposed to the estate tax, a qualified personal residence trust could
help you gain estate tax efficiency. Before we provide an explanation, we should
look at the federal transfer tax parameters so that you can determine the extent of
your liability.
FEDERAL ESTATE TAX
There is a federal estate tax credit or exclusion. This is the amount that you can
transfer to others tax-free. During the 2014 calendar year, the federal estate tax
exclusion is $5.34 million. There are annual adjustments to account for inflation,
so it may go up a bit next year.
What Is a Qualified Personal Residence Trust? www.myestateplan.com 3
It should be noted that there is an unlimited marital deduction. You can transfer
unlimited assets to your spouse free of the estate tax. The $5.34 million exclusion
applies to transfers to people other than your spouse.
The top rate of the federal estate tax is 40 percent, so we are talking about a very
significant source of asset erosion.
FEDERAL GIFT TAX
The federal gift tax comes into play when you are looking at qualified personal
residence trusts, so
we should explain
this tax as well.
The tax man does
not want you to
give gifts while you
are living to avoid
the estate tax, so
we have a federal
gift tax. This tax is
unified with the
federal estate tax.
The $5.34 million exclusion applies to lifetime gifts that you give along with the
value of the estate that you are passing on to your heirs.
What Is a Qualified Personal Residence Trust? www.myestateplan.com 4
This tax carries the same 40 percent maximum rate, and the unlimited marital
deduction extends to lifetime gifting.
QUALIFIED PERSONAL RESIDENCE TRUSTS
Now that we have shared the necessary background information, we can look at
qualified personal residence trusts. The idea is to fund the trust with your home.
You name a beneficiary who will assume ownership of the home after the trust
term expires. This term is referred to as the retained income period.
During the retained income period, you continue to reside in the home as usual.
You decide on the length of this term. It can be five years, 10 years, 15 years, or
whatever you choose.
When you convey the
home into the
qualified personal
residence trust, you
are removing the
home from your
estate for tax
purposes. That's the
good news. The bad
news is that you are
giving a taxable gift
to the beneficiary.
What Is a Qualified Personal Residence Trust? www.myestateplan.com 5
However, the taxable value of the gift is going to be considerably less than the
actual market value of the home. This is because of the retained income period.
Imagine trying to sell your home on the open market. A buyer is interested, but
you tell her that she cannot assume ownership of the home for 15 years. The
buyer would be unwilling to pay the full market value under that stipulation.
The Internal Revenue Service takes this dynamic into account when the taxable
value of the gift is being calculated. As a result, the taxable value is greatly
reduced.
When the transfer takes place at the end of the retained income period, the gift
tax will be applicable, but the tax savings will be considerable.
There is something to consider when you are setting the duration of the trust
term. If you were to pass away before the retained income period had expired, the
strategy would fail, and the home would once again become part of your taxable
estate.
The longer you stay in the home, the greater the tax savings will be. However, you
do have to be conservative in light of the fact that the strategy can fall apart if you
pass away before the expiration of the term.
What Is a Qualified Personal Residence Trust? www.myestateplan.com 6
SUMMARY
High net worth individuals who are exposed to federal transfer taxes can gain tax
efficiency through the creation of a qualified personal residence trust.
When you execute this strategy properly, you can significantly reduce the taxable
value of your home. Since your home may be one of your most valuable assets,
this can be a very effective part of your wealth preservation plan.
To learn more about qualified personal residence trusts, set up a consultation
with a licensed estate planning attorney.
REFERENCES
The CPA Journal http://www.nysscpa.org/cpajournal/2005/1205/essentials/p52.htm Journal of Accountancy http://www.journalofaccountancy.com/Issues/2006/Oct/TheAbcsOfQprts.htm
What Is a Qualified Personal Residence Trust? www.myestateplan.com 7
About the Author
Mark S. Eghrari
Mark S. Eghrari is an attorney in private practice in Smithtown, New
York. He has been in practice since 1988. Mark S. Eghrari provides
extensive estate and tax planning services to individuals and
businesses. Mr. Eghrari’s primary focus is helping clients avoid
probate, minimize or eliminate Federal and State Estate taxes and
protect their assets from the high cost of nursing care, if they become
ill. Mr. Eghrari’s expertise is in providing unique and innovative
estate planning solutions that create a secure future for his clients and their loved ones. Mr.
Eghrari is a member of the American Bar Association and New York State Bar Association as
well as the National Academy of Elder Law Attorneys and the American Academy of Estate
Planning Attorneys.
Mr. Eghrari completed his undergraduate work at Lafayette College in Easton, Pennsylvania
and received his MBA in banking and finance from Hofstra University on Long Island. He
earned his Juris Doctorate from the Hofstra University School of Law, where he was a member
of the Law Review. While in law school, Mr. Eghrari gained practical experience in the
corporate tax department of Citicorp in New York city.
Mark S. Eghrari and Associates PLLC www.myestateplan.com 50 Karl Avenue, Suite 202 Smithtown, NY 11787 Phone: (631) 265-0599 Fax: (631) 265-0754