taxes

Shielding your assets from estate taxes

The tax hurdle rate. The QPRT is one of the few trusts that does not benefit from a low hurdle rate. That's because the value of the gift is determined by the fair market value of the home, minus the "retained interest," or the owner's right to live in it for a term of years. The value of the retained interest is determined by the age of the grantor when the trust is set up, the term of years for use of the home and the hurdle rate. Ideally, a higher hurdle rate will mean the retained interest is higher, so the value of the gift is lower (fair market value of the home minus the retained interest equals the value of the gift). With a QPRT, the grantor is removing the home from his estate, thereby saving estate taxes and also saving gift taxes because the value of the gift is less if the hurdle rate is high.

The value of the home, based on appraisals. In the current housing market with low home prices, "clients are interested" despite the low hurdle rate, Henry says. For example, he adds, if a 70-year-old puts a home in a QPRT with a 10-year term, the value of the gift will be derived from the IRS calculations using the donor's age, the term of years and the current hurdle rate. If the home were to appreciate 4 percent per year, at the end of 10 years all appreciation above the value of the gift will pass tax-free to the heirs.

Obviously there's some guessing involved about where home prices are headed and when. For example, if someone had put home valued at $1 million home into a QPRT when home prices were soaring and the value of the home dropped to $450,000, it's not such a great deal, says Henry. "But if you think home values have bottomed out, now is the time to do it."

Capturing appreciation from stocks

A popular type of GRAT right now for stocks you think might appreciate, according to Henry, is called the short-term, zeroed-out GRAT. The term is only two years, and at the end of the first year, the trust pays back the grantor, or the creator of the trust, approximately 46 percent of the value of the assets that were put in the trust. At the end of the second year, it pays 54 percent. So, in effect, the grantor gets the assets back that he put in (in cash or original stock), and all appreciation above the hurdle rate goes to heirs tax-free. That's why it makes sense to put in a stock the owner thinks will rise rapidly, for instance, one on the verge of going public.

If the stock doesn't appreciate, "the worst-case scenario is that the owner gets the asset back and there was no gift," says Henry.

The current low-rate environment and depressed home prices are making GRATs and QPRTs particularly attractive estate tax techniques now, but Henry says clients always need to keep the larger question in mind when deciding to give away assets: "How much can you afford to give away -- or, said another way -- how much do you need to keep to feel comfortable?"

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