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A Better Partnership

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Apr 2014
09
April 09, 2014

How Your Cottage Can Save You Money


With the real estate market improving and interest rates rising, this may be a good time to transfer the family cottage or second home to the next generation using a Qualified Personal Residence Trust, or QPRT. It is a great estate planning technique for wealthy individuals who are in good health and own valuable real estate.

Gift and estate taxes can be significant for wealthy individuals.  The QPRT is an irrevocable trust that you can use to remove the family cottage or second home from your taxable estate.

Here’s how it works: In order to maximize tax savings, create the QPRT and transfer your interest in the property into the trust but retain the right to live in or use the property for a specified number of years. This transaction is a gift of the property to the beneficiaries of the QPRT, who will receive the property at the expiration of the term of the trust.

A key feature of the QPRT is that the gift is “discounted” to an amount below the current fair market value of the property. Each beneficiary of the trust must be a member of your family, but generally grandchildren and great-grandchildren should not be named as beneficiaries.

Upon the expiration of the term of the trust, you are required to pay rent, at the fair market rental value, to the beneficiaries if you choose to continue to use the property.

If you live beyond the term of the QPRT, the property will not be included in your gross estate and therefore the value of the property will not be subject to estate tax. The trust will have shifted all appreciation in the property to the beneficiaries without incurring gift or estate taxes.

If you fail to survive the term of the QPRT, the trust terminates and the property reverts back into your estate. A credit will be given for any gift tax paid or gift tax unified credit used.

Even if you don’t live for the term of the trust, you are no worse off than if you had never created one.  If you own valuable real estate and think a QPRT might be a potential planning option for you, contact your Warner Norcross & Judd attorney for more information.

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