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Shelter Home From Estate Tax - By Kelly J. Bullis

Updated: Feb 13, 2023

Remember a few weeks back what I went over how the “rich” pay most of the Federal Income Tax? A natural consequence of that is encouraging many brilliant folks to work overtime in coming up with ways to legally reduce that tax burden whenever and wherever possible. Sometimes, one of those ideas ends up becoming a great tool that the “not so rich” (aka the rest of us) can use as well. Here is one of them.

Did you know that when you die, everything you own is added up and if it totals enough, your heirs may have to give some of it to the IRS in the form of Estate Tax? Currently, the Unified Federal Gift and Estate Tax Exemption is almost $12 million, but it is scheduled to drop to $5 million in 2026 and if Biden wins, his party wants to drop it even lower. Suddenly, your “small” estate might become taxable. Usually, one of the biggest assets in your estate is your home. What follows is a very creative way to reduce the tax impact of your personal residence on your estate.

It's called a QPRT. (Qualified Personal Residence Trust) Basically, you create a QPRT and transfer your home into it, naming yourself as the Trustee.

As the grantor (the person who creates the trust), you retain an “interest” (right to live in, use as you choose, etc.) after the transfer. Usually, the “interest” is the right to live in the home for a certain period of time. At the end of the time limit you specify in the QPRT, that the home passes to the trust beneficiaries, usually your children. Because this is a deferred gift, the amount of the gift to report at the time of creating the QPRT may be a relatively small fraction of the home’s current value, based on the prevailing Section 7520 rate.

Here is an example of how this works. Let us say you transfer your $500,000 home to a QPRT in January of 2021 at the age of 60 and retain the right to live there until you turn 80. If you outlive the trust provisions, the home ownership passes to your children.

With a current Section 7520 rate of 2.2% (it goes up and down with inflation), the initial taxable gift is valued at $187,700. As long as your lifetime gifts don’t exceed the Unified Federal Gift and Estate Tax Exemption, no federal gift tax will be owed. You will still need to file a Gift Tax Return in the year you created the QPRT, just no tax to pay.

If you survive the 20-year term, the residence passes to your children free of federal gift tax. (Which, there is a way for you continue to live in, rent free, until you die or move out for whatever reason.) Suppose your home is worth double its current value at that point. As a result, you’ll have passed a $1 million home to your children while only using up $187.700 of your Unified Federal Gift and Estate Tax Exemption. Over $800,000 escaping the potential amount being taxed on your estate. That’s not a small amount in anybody’s book! Another benefit is to not have the home liquidated (and not given to your heirs) to pay for Assisted Living costs QPRT must be active for at least 5 years) if Medicaid is paying that bill.

Did you hear? Prov 15:22 says, “Without counsel plans fail, but with many advisers they succeed.”

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