Declining property values and changes in tax rules mean it may be a good time to transfer property to your heirs by using a qualified personal residence trust (QPRT).
With a QPRT, you create a trust and transfer your home into it.
In doing so, you reserve the right to live in your home for a specified period of time.
At the end of that period, your home passes to your beneficiaries, free of gift tax.
As for the potential tax benefits of a QPRT, you can move a big asset out of your estate at a fraction of the future value.
If you set up a QPRT at age 60 when your property is worth $2.5 million, you may discount the $2.5 million by an interest rate set by the Internal Revenue Service.
The Internal Revenue Service sets the rate monthly.
At a recent 3% rate, the current value of a $2.5 million gift to be made in 10 years is $1.59 million.
If you die before the trust ends, the home is included in your taxable estate and estate tax will be paid on it, meaning the purpose of the trust will be defeated.
But if you don’t die before the trust ends, your home will be distributed to your heirs without further transfer tax.
The strategy may make the most sense for individuals with a net worth above the estate tax exemption, which is currently $5 million per person.
However, such a strategy may also be a smart move for those whose homes might appreciate or if the estate tax exemption drops.
Qualified personal residence trusts can be complicated, though.
For example, you have to give up the home when the trust ends, even if you are still alive.
As a result, if you’re considering a qualified personal residence trust, it’s a good idea to speak with a financial advisor first.