Our clients recently came to us to manage their family’s portfolios. They are nearing retirement and are concerned about taxes. They mentioned that they had just bought a beautiful home on the Isle of Palms in South Carolina near Charleston. They thought it was the place for them to retire and a convenient place for their three children to gather during the holidays. During one of our meetings, the Smiths asked how they could pass on the Isle of Palms home to their three children without paying a large gift tax on the transfer. We suggested the technique of initiating a QPRT – a Qualified Personal Residence Trust.
We explained that the purpose of this trust was to remove the home from their estate and reduce the gift tax on the appreciated value of their South Carolina home. This is huge – QPRTs are usually for second homes, beach homes, or ski houses which experience a great deal of appreciation. Therefore, removing the assets from the estate and making a gift to your children is a tax-efficient way to pass on a real asset to your children. Excited by the idea and the notion of lessening their estate tax burden they listened to the idea. They knew they wanted their children to have the Isle of Palms house.
We continued to clarify that a QPRT is an Irrevocable Grantor Trust, which means that you transfer your second home during your lifetime into a trust for a period of time and the grantor could name their children as beneficiaries who will receive the house after the term of the QPRT had expired. The Smiths liked the fact that they could continue to live and enjoy the property year-round and that of course the kids would be able to visit.
The Smiths would transfer the property by recording a deed with the local property registry and retitling the residence in the QPRT’s name such as the Smith Pennsylvania Personal Residence Trust. There is a time term, meaning that the Smiths must live for a period of time for the Trust to be effective. For example, seven (7) years. After seven years, the house and the appreciated value of the home now belong to their three kids. They said, “Wait a minute, we don’t want to be kicked out of our own home!” We reassured the Smiths that they would still live in their home, and maintain the house – business as usual. Although your children own the home.
They were thrilled to learn that they could enjoy the house and have the ownership passed to their kids in a smooth fashion. More importantly, the Smiths recognized the value and appreciated value of the home would be removed from their estate as a taxable asset. If the Smiths did not outlive the term for the QPRT then the value of the property would be included in their taxable estate.
The last little wrinkle, which was a bonus, we told the Smiths they could gift money to their kids in the form of “rent.” The QPRT rules state that the Smiths should pay fair market rent to their kids, as they are the new owners of the house. John Smith said, “Forget it, we are not paying our kids rent, as the house is our house!!” We clarified that paying “rent” to your three kids is just another way to remove cash from the estate efficiently, by gifting it to their kids. After all the Smiths wanted their children to have the money so why not see them enjoy it? After John thought for a minute, he said he could see the value of giving his kids a little cash without having to consider the money as a gift for gift tax purposes.
As we walked through the idea of a QPRT with the Smiths for their Isle of Palms home there were so many positive attributes for this estate planning idea. They were fond of the idea of being able to give the house to their kids efficiently and effectively. They knew that the house was just going to increase in value each year and they did not want to have a large tax burden for their kids, this appreciation in the house would be sheltered inside the QPRT. What huge tax savings and a great relief!!
We are happy to talk about the idea of a QPRT or other thoughts concerning your investment portfolio.
Schenley Capital Inc.
417 Walnut Street, Suite 200
Sewickley, PA 15143
This scenario is based on real client interactions but not on a specific client. Schenley Capital, Inc. does not provide legal, accounting, or tax advice. Any statement regarding such matters is explanatory and may not be relied upon as definitive advice. All investors are advised to consult with their legal, accounting, and tax advisers regarding any potential investment.