The Silver Lining in Tough Economic Times, 08/30/2008

The economy is weaker than it was in the late 1990’s. Interest rates have been rising. Food and energy prices have been skyrocketing. Home values have been falling. It is getting to the point where we hardly want to watch the news anymore.

However, there is a silver lining behind the dark economic outlook. As home prices fall and interest rates rise, one estate planning strategy for persons with taxable estates becomes particularly attractive. A Qualified Personal Residence Trust or “QPRT” is a great way to get the value of your home out of your estate for estate tax purposes at a discount. You transfer your home to an irrevocable trust you set up for that purpose. You retain all rights in the home for a period of years, which you select. After the expiration of the period, you can continue to live there by paying rent to the trust (which further helps diminish your taxable estate). The amount an individual can leave estate tax-free is $2 million, rising to $3.5 million in 2009, but then falling to only $1 million in 2011. (If you have less than $1 million in assets, a QPRT may not be an appropriate estate planning strategy for you.)

Let’s look at an example. In 2003, your home was worth $500,000. Today, it is worth $400,000. The interest rate used by the IRS was 3% in 2003. Let’s say that at the time of your transfer that interest rate has increased to 5%. Let’s further assume you are 70 years old and keep a retained interest for 8 years and then pay rent. The actuarial value of the remainder interest gifted to your kids in 2003 would have been approximately $292,000. If you did that same transaction in today’s environment with the home at $400,000 and the interest rate at 5%, the value of the gifted interest would be less than $200,000. That’s about a 31.5% reduction in the value of the gifted interest. Let’s say your home goes up in value to $800,000. You will have gotten the whole thing out of your estate for a value of less than $200,000! This preserves more of the amount that can pass estate tax-free to be used for your other assets.

As you can see, this is a great time to think about this strategy. The higher the interest rates and the lower the home values, the more powerful this strategy becomes. There may not be much to be thankful about in economic news nowadays. But, this can be a great time for certain estate planning strategies like this one. A qualified attorney from Morris Hall can help you design and implement a strategy for these tough economic times that meets your unique needs; start by requesting a free consultation.