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Pass Real Estate Appreciation to Beneficiaries Tax Free

Carlo R. Ferri, CPA Director, Tax Strategies, Construction Industry Group Co-Leader

The future of the estate tax continues to be discussed in Washington D.C. Whether the amount of the unified credit exemption taxpayers can claim remains at $5 million after December 31, 2012, goes back to $1 million, or is enacted as some other number, one thing is certain: The estate tax will not vanish. However, some view the estate tax as a voluntary tax, applying to those who do not plan. For taxpayers with value in their personal residences or vacation properties, opportunities exist through December 31, 2012 to use the $5 million exemption ($10 million for spouses) to eliminate value subject to estate tax.

Although many view the substantial reduction in the housing market as a detriment, it can be an estate-planning opportunity by transferring personal real estate to an irrevocable trust. This technique would “freeze” the property value and allow the future appreciation to pass estate tax-free to beneficiaries.

To take advantage of this benefit, a common technique is the use of a Qualified Personal Residence Trust (QPRT). A QPRT allows the trust’s grantor to transfer real estate to a trust and retain the right to continue to occupy the property for a specified term. Once the terms of the trust have expired, ownership passes to the beneficiaries, usually the children. Assuming the grantor survives the time period, the value of the real estate is removed from the grantor’s estate. Even better, the grantor may continue to occupy the property after the time terms have expired and ownership has transferred. However, a fair market value rent must be paid. If the grantor does not survive the time period, the transaction is deemed not to have occurred.

The transfer of real estate is considered a gift. The gift amount is based upon the age of the grantor and time period involved. Life and residual interest are determined. The residual interest is the taxable gift and it can be offset by the $5 million exemption.

Under present law, the $5 million exemption will revert to $1 million effective January 1, 2013. For sizable estates that are not liquid, and with the past history of appreciating real estate values, you may want to consider taking advantage of a QPRT. To get started, you would need to obtain a fair market value appraisal and determine a time period. With out of pocket expenses limited to appraisals and trust costs, the benefits should outweight the costs.

We encourage you to contact Kreischer Miller’s Tax Strategies group if you would like to discuss whether a qualified personal residence trust may make sense for you.

Carlo R. Ferri can be reached at Email or 215.441.4600.

Contact the Author

Carlo R. Ferri, CPA

Carlo R. Ferri, CPA

Director, Tax Strategies, Construction Industry Group Co-Leader

Construction Specialist, Business Tax Specialist, Individual Tax Specialist

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