To: voodooist who wrote (27 ) 4/3/1998 1:38:00 AM From: Taxboy Read Replies (1) | Respond to
The trust you referred to is a "QPRT" or Qualified Personal Residence Trust, and it works like this. Say you are a 55 year old and own the house you live in (or you can use a vacation home) worth $500,000, owned free and clear. Figure that your life expectancy is about 25 years (this is an important number - because you have to live this long for the trust to really work its magic), so you transfer the house to a trust the terms of which are (1) you have the right to live in the house for 25 years and (2) at the end of the twenty five years, the house is divided equally betweeen your living children. If you die in those 25 years, the house goes back to your estate, to be distributed according to the terms of your living trust. By doing this, you make a gift of $500,000 less (1) the right to live in the house for 25 years and (2) the reversion to your estate if you die. Depending on where interest rates are, you have made a gift of between $50,000 to $100,000. For this cost, if you live out the trust, the house and any appreciation is out of your estate. By setting up the QPRT, and assuming that house values double in 25 years, you remove $1,000,000 from your estate (saving around $400,000 or more in estate taxes) by setting up the QPRT. There is no difference in your lifestyle, all you have to do is wake up everyday for 25 years. At the end of the term, you can even rent the house from your children. If you have not used your full Applicable Credit Amount, you will not owe gift tax and you will have skirted the estate tax in a way that Clinton has proposed getting rid of. The only downsides are that if you die during the term it goes back in your estate and that if you sell, you can't pull your cash out, instead it goes into an annuity that gives you a stream of income. Also it is very difficult to refinance since lenders do not want to loan to a QPRT and you can't remove the house from the trust, since it is irrevocable. This actually can be a good asset protection strategy also, if you are solvent when you make the transfer but fear future liabilities might take your house away.
