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Keeping Assets in the Family

Besides the basic tax bypass trust structure there are several ways of reducing exposure to estate tax, though most of them involve giving away control of an asset.

The simplest of these is simply making gifts within the annual $13,000 gift tax exclusion. Larger gifts made by people with enough wealth to face estate tax count against the estate tax exemptions at death, currently $5 million for federal tax, $1 million for state tax. But anyone can make gifts of up to $13,000 a year per beneficiary without any such gift tax consequences. Thus, a married couple with two children and four grandchildren can remove up to $156,000 each year from their estate if each spouse makes gifts of $13,000 to each child and grandchild (2 spouses x (2 children + 4 grandchildren) = 12 gifts x $13,000 = $156,000).

Other strategies are more complex. Here is one that involves a beach house you own and want to keep in the family. (In a parallel universe rather different from ours, assume this beach house keeps appreciating in value, raising concern that your family may have to sell it to pay estate taxes after you die.) In that case, consider a qualified personal residence trust (QPRT).

You transfer the house to the QPRT on condition that you have the right to live there rent-free for a specific term, usually 10 years. During that term you would continue to be responsible for all expenses of the house, including maintenance and real estate taxes. After 10 years, the house would pass to your children free of any gift or estate tax. You could continue to live in the house beyond the term, but you would have to pay rent at a fair-market rate.

The initial transfer of the house to the QPRT trust is a taxable gift, though not in the amount of the full, fair-market value. The value of the gift would be discounted by calculations based on IRS actuarial tables taking into account your age, the 10-year term of your retained interest and applicable federal interest rate as of the date of transfer.

Thus, for example, a beach house with a fair market value of $1 million at the time of transfer might be valued for gift tax purposes at $500,000, which amount would be counted against your estate tax exemption. If the property appreciates from $1 million to $1.5 million by the time you die, you will have transferred $1.5 million out of your estate in the form of a gift valued at $500,000 for estate and gift tax purposes. However, if you die before the end of the 10-year term, the property is included in your estate and the $500,000 originally deducted from the available estate tax exemption would be restored.

For more information, please contact Jay Merwin at merwin@bowie-jensen.com.

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