Fedele and Murray, P.C.

17 Walpole Street, Norwood, MA 02062-3318 - (781) 551-5900

Qualified Personal Residence Trusts

Another estate planning tool that is used frequently is a GRIT, which stands for a "Grantor Retained Income Trust," now more often called a QPRT, or "Qualified Personal Residence Trust." The idea behind it is to maximize the amount of gifts you can make while minimizing the amount of the portion of your Unified Credit (your $11,200,000 "exemption") to be used. Generally, one is limited to a gift of $15,000 to each person each year without eating into one’s exemption. One way to avoid this limitation, however, is with a QPRT, which allows you to give away your principal residence or a vacation home, but retain the right to use it for a specified length of time. For example, assume you own a $500,000 vacation home and you want to reduce your taxable estate. If you gave away the residence outright to your children, you would use $500,000 of your exemption. If, however, you gave away the residence but retained the right to live there for 10 years, the value of the gift is reduced by the value of your 10 year retained interest. Assuming an age of 70, that retained interest would be worth about $347,185, so that the gift is only valued at about $152,815. (Note: the foregoing computations change based upon the current interest rate which the IRS prescribes for making these calculations.)  Thus, if you survive for the 10 years a gift that otherwise would have used $500,000 of your exemption will instead have been made using only $152,815 of that exemption. The longer the period you reserve to live in the residence the smaller will be the gift that is made. It is necessary, however, that you survive the entire period if the tax savings are to work. If you died during the "retained interest" period the residence is still part of your estate as if you had kept it. Thus, it is best to choose a period you believe you should outlive, but even if you did not survive the period your estate is no worse off than if you did nothing. Because it is a "Heads, you win—Tails, you break even" proposition, there is little to lose by trying a QPRT.

If you assume that realty will grow at a 4% annual rate, in the example above, the vacation home should be worth about $740,122 in 10 years. The net result will be an actual tax savings of about $293,654 for your family.

At the end of the retained interest period you would no longer own the house and would have to pay rent, but the rent payable to your children can actually serve as another means of transferring wealth to your children without bearing an estate tax.

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