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San Clemente Journal

Soaring Property Values Create Potential Estate Tax Concerns

May 05, 2005 03:36PM ● By Don Kindred
by Michael Vandenburg, CFP
 The real estate boom over the last few years has been very exciting for homeowners and real estate investors alike. That house by the beach you bought fifteen years ago for a few hundred thousand dollars is now worth well over a million…maybe even two.What you won’t be very excited about is the potential taxes those gains can create. Even if you don’t sell your home, you could be in for a different kind of tax much higher than capital gains. You won’t see it coming; in fact, you might not even think it pertains to you. You won’t even be the one paying it…your children will. I’m talking about estate tax. 
A lot of people don’t consider themselves to be wealthy enough to be concerned about estate tax, but under current law, anything over $1,500,000 is taxable. If your home is worth more than that then you already have a taxable estate without even considering your investment assets. The good news is that the exemption amounts have been going up and will continue to do so until 2010. The other good news is that with proper planning, you can reduce or eliminate the tax altogether. 
One way to reduce the size of your estate dramatically and pass a personal residence or vacation home to your children is by creating a Qualified Personal Residence Trust (QPRT). If done properly, you can pass your personal or vacation home to your children with little or no tax at all. Here’s how it works:
• Place the personal residence or vacation home in an irrevocable trust.
• The donor retains the right to live in the home for a fixed number of years.
• After the term, the property passes to the beneficiaries of the trust.
The actual tax reduction depends on the term of the trust and the amount you are passing to your beneficiaries. The longer the term, the bigger the reduction. You also must outlive the term of the trust. If you pass away before the trust term is completed the property goes back into your estate. A QPRT is also irrevocable, meaning that unless the trust ceases to qualify as a QPRT, the donor should not expect to be able to regain ownership of the property. A married couple with multiple homes or vacation homes can create up to 4 QPRT’s to pass several properties to their children and even further reduce their taxable estate. 
I know there are two big questions everyone has about these trusts. The first question everyone asks is if they will be homeless after the trust term is completed. The answer is obviously no, but you must actually rent or lease the home back from your beneficiaries after the trust term is completed if you would like to continue to live in it. The second question everyone asks is how long should the trust term be. The answer to that gets a little trickier, but the main things to consider is that you must outlive the term of the trust, and the longer you structure the trust, the greater tax reduction you receive. 
Over the next few years there could be some major changes in the estate tax laws and this is an oversimplified, short version of how the trust works. If you think this might be a good idea for you, the first step you need to take is to talk to your Certified Financial Planner™ to see if this is something you should pursue. You will then need a qualified estate-planning attorney to create a trust that will achieve your goals. The potential savings could be hundreds of thousands of dollars. For most people that create these trusts, however, the biggest benefit is the ability to pass on a special place to someone they love that holds a lifetime of memories.