Gift Opportunities May Fade Soon

Folks should not lose sight of the fact that significant gift opportunities exist today, though may not be around for long.  Present law permits individuals to transfer as much as $5 million in wealth to kids and others in 2011.  Barack and/or the “Super Committee” of Congress may make it their business to end this situation – and rumor has it that they may very well do so sooner rather than later!  But if you’re in a position to do any significant gifting – in any amounts, indeed, but especially if you’re able to take advantage of the $5 million exclusion, you had better act soon – that means now!

We could go on forever about the myriad of ways in which folks might take advantage of the significant gifting opportunities available today.  One in particular worth mentioning, especially in this era of low interest rates, is the “Qualified Personal Residence Trust,” or “QPRT.”

This is a special kind of trust used to transfer a personal residence, typically to your kids, at a potentially significant savings in gift taxation.  Here’s how it works:  your favorite lawyer creates the trust document, generally with you (and your spouse, if you’re married) as trustee(s).  You then transfer your residence (might be your primary residence, or even a vacation home) into the trust, which by its terms, allows you to continue to occupy the place for any fixed period of years you choose, which should be a term, by the way, which you expect to outlive.  During this term, you continue to pay the mortgage, taxes, insurance, maintenance and all operating expenses just like you do now.  When the fixed term ends, your kids own the house!

So far, so good, you say, but what happens then?  Do your kids boot you out onto the street?  Probably not, because when you formed the trust, you provided for the right to keep living in the house, though you will have to be prepared to pay rent, pursuant to a lease which then kicks in.

So what’s the big advantage?  Well, let’s say your house is worth $1 million today.  An outright gift today to the kids would cause you to use up $1 million of that lifetime gift exclusion.  In the QPRT scenario, however, the taxable gift is not the full $1 million, but that number reduced by the present value (measured in a way sanctioned by the Revenooers) of your right to live in the shack for the fixed period of years mentioned above.  The answer to this calculation is dependent largely on the fixed term you select – the longer the term, the smaller the gift, though if you get too greedy on the term, and pass away before the term expires, you fail in achieving your estate planning goal, though are not really any worse off than had you done nothing in the first place.

Got that?

It’s really not as complicated as it may sound – see a tax pro who can run you through some real numbers, and bring the transaction into focus for you with real numbers.

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He can be reached at 831-7288, welcomes comments at jquinn@ashleyquinncpas.com, and invites readers to consider his other commentary at http://blog.nolo.com/taxes.

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