Gimme Shelter

by Stephen Kass on July 19, 2012

At a time when few things are certain a death and taxes, techniques that freeze the
value of appreciating assets for estate tax purposes can be an important way for CPAs to
help clients save money. One such technique is the qualified personal residence trust
(QPRT). Because the regulations governing these trusts have changed since they first
were created, CPAs now find they are less flexible. However, a new strategy has
emerged that means QPRTs remain an attractive tax planning tool for certain
homeowners.
Although qualified personal residence trusts are less flexible than when then first
were created, they still can provide attractive tax benefits to certain homeowners. To set
up a QPRT, a taxpayer transfers a remained interest in his or her personal residence to
someone else in trust while retaining possession of the residence for a term of years.
Under 1997 treasury department regulations, a taxpayer no longer can buy back
the residence from the trust during its term. This was a common practice under prior law
because it left trust beneficiaries with cash rather than a residence with a low-income tax
basis.
Individuals or couples cannot use their annual gift tax exclusions to shelter QPRT
transfers from tax. Rather, they must reduce their unified credit. While this reduces the
amount they can leave tax-free at death, the hope is the tax savings on the property’s
subsequent appreciation will make the transaction worthwhile.
The property of a taxpayer can put in a QPRT includes his or her primary
residence or a vacation home if personal use exceeds 14 days per year or 10% of the days
it is rented out. The trustee can sell the residence during the trust term and has two years
to reinvest the proceeds in a replacement residence.
Although the grantors cannot purchase the residence during the trust term, the
remainder beneficiaries can buy it just before the trust ends in exchanged for a
promissory note. When the trust terminates, the note is distributed to the children and
disappears as a liability. The children’s income tax basis in the residence now equals its
purchase price and the parents can avoid capital gains on up to $500,000 under IRC
section 121.
What if a taxpayer does not have earned income but wants to take advantage of
the benefits of an IRA? Or, what if she has the good fortune of receiving an unusually
large bonus and wants to shelter some of the income from tax? Taxpayers can shelter
their income through a charity gift arrangement called a deferred gift annuity. A deferred
gift annuity involves a simple contract between a donor and a charity.
In exchange for an irrevocable gift of cash or securities, a charity agrees to pay
the taxpayer or one to two other annuitants a fixed sum each year for life, beginning at
least one year after the gift date. A portion of each payment is tax-free, which will
increase each payment’s after-tax value depending upon the taxpayer’s bracket.
A minimum gift is usually $5,000, payable in cash, mutual fund shares, or
appreciated securities. In return, the taxpayer will receive an immediate income tax
deduction for a substantial portion of the value of the gift.
Some people make one gift, other make gifts each year until retirement. Unlike
other retirement savings vehicles, there are no limits on the amount that may be gifted.

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