By Roger C. Hurd

HURD, HORVATH & ROSS, P.A.
Palm Beach Gardens, FL

One of the goals of good estate planning is to transfer assets to the younger generation at the lowest tax cost. In certain cases, the estate and gift tax laws allow the taxable value of an asset to be reduced below its actual value before the tax is assessed. One of those cases is the " Qualified Personal Residence Trust" or "QPRT."

Let's say you are 55 years old and divorced, and have a home (primary or secondary residence) worth $300,000. Let's also assume that you have used your $600,000 gift and estate tax "equivalent exemption." An outright gift of the home to your children in March of 1994 would have generated a gift tax of $114,000. But if instead, you had given the home to a QPRT (reserving the right to use the house yourself for 20 years), your gift tax would have been $32,099 (a savings of almost $82,000).

This may sound too good to be true, but there is a logical reason for the difference. Under the QPRT you give the home to a trust, but reserve the legal right to use the home for a specified period (20 years in our example); at the end of that period, the home can be transferred outright to your children or other beneficiaries. The IRS says that your retained right to use the home for 20 years has a substantial value (at March 1994 interest rates, about 71% of the $300,000 total value of the property). Accordingly, when you put the home into the trust you have only given away about 29% of the value and that is the amount upon which the tax is assessed.

A few points to remember are as follows:

• 1. The reduction in taxable value varies with the length of the term for which your use is retained; the longer the term, the greater the reduction (and the lower the tax).

• 2. If you create a QPRT and die before the end of the term, the entire date of death value of the home is taxed in your estate, and the tax benefit of the QPRT is lost. This obviously puts a premium on selecting a term that is long enough to provide a good-sized tax benefit, but short enough to give you a fighting chance of surviving it.

• 3. After the term ends and the home passes to the children, your continued use of it will require you to pay a fair rent to your children. But as long as you can afford it, this can actually be a good way of getting additional funds out of your estate without gift tax.

• 4. The basis of the home for the purpose of determining capital gains tax on sale will be the same for your children as it was for you (your cost plus capital improvements). A home unlikely to be sold by the children (such as a long-time family vacation spot) is thus a particularly good candidate for QPRT.

• 5. A QPRT is a popular estate planning tool but it is very technical in nature.