To understand the value of a qualified personal residence trust, you have to absorb some background information about federal transfer taxes. You may assume that you can give assets to others without incurring any tax responsibilities, but in fact, the tax man does not see it this way.
There is a federal gift tax that can be applied when large gifts are given. You can give up to $14,000 per person to any number of gift recipients tax-free within a year, but anything above this would be subject to the federal gift tax.
However, there is a unified gift and estate tax exclusion. The amount of this exclusion is $5.43 million. As a result, you could use a portion of this exclusion to give a tax-free gift to someone within a calendar year that exceeded $14,000.
The estate tax is unified with the gift tax. The $5.43 million is a unified exclusion, and it applies to your estate along with the gifts that you give during your life. We should point out the fact that the maximum rate of these two taxes is 40 percent at the time of this writing.
Qualified Personal Residence Trusts
Now that you have the requisite background information, we can look at the value of qualified personal residence trusts. Your home may be the most valuable thing that you have to pass along to your loved ones, and real estate is very valuable in southern California. Your home could be the single possession that is pushing your estate into taxable territory.
It would be possible to transfer the home at a tax discount if you convey it into a qualified personal residence trust. At first, you remain in the home for a period of time that you decide upon when you create the trust. You name a beneficiary who will assume ownership of the home after the term expires.
You will be giving a taxable gift to the beneficiary, but the taxable value of the gift will be much less than its fair market value. This is because of the fact that you will be remaining in the home for a number of years after you convey it into the trust. The interim is referred to as the retained income period.
No one would pay full fair market value for the home if they could not assume possession for 10 or 15 years, and the IRS takes this into account. As a result, the valuation for gift tax purposes would be significantly less than the full market value of the home, and this would facilitate a tax efficient transfer.
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Attorney Caprice L. Collins is a top rated Harvard Law School graduate. She has 34 years of legal experience with a successful law practice devoted exclusively to Estate/Business Planning and Trust Administration. Attorney Collins is a well-respected keynote speaker on Wills, Living Trusts, Estate Planning, Business Planning and Trust Administration. She has appeared on California’s Real Estate Radio Station KTLK AM 1150 as a legal expert on Estate Planning and Living Trusts among many other notable media appearances.