Tag: gift tax

What Is a Qualified Personal Residence Trust and Can You Create One?

A qualified personal residence trust could help you limit estate and gift tax exposure while allowing you to live in your home for years to come. This estate planning device also passes on your house to your relatives or other beneficiaries of your choice.

How Does a Qualified Personal Residence Trust Work?

To create a qualified personal residence trust (“QPRT”), a homeowner transfers his or her personal residence to a trust specifically prepared to meet IRS QPRT requirements. The trust language states that the trust’s creator (the homeowner) retains an interest in the house for a set number of years. During that time, the homeowner can live in the house rent free. After those years pass, the house passes to designated beneficiaries such as children.

What Are the Tax Benefits of a Qualified Personal Residence Trust?

The main benefit of setting up a QPRT is reduction of gift or estate taxes. If a homeowner were to give his or her children the house directly, the IRS would assess gift tax on the transfer. Depending on the value of the home, this tax could be quite expensive. The situation is similar if the homeowner leaves the house to the children in his or her will.

Starting a QPRT can greatly reduce the potential gift or estate taxes. Basically, because the homeowner retains an interest in the home for a set number of years listed in the trust, the gift’s value is reduced by the value of that interest. As long as the homeowner survives past the set number of years, the gift’s value goes down and thus reduces the amount of gift taxes due.

Further, because the house gets transferred to the chosen beneficiaries, it is no longer part of the homeowner’s estate, which could reduce estate tax liability in the future. A smaller estate means less likelihood that the estate will owe taxes.

How Can You Get Started Making a QPRT?

There are many pros and cons to QPRTs beyond the scope of this blog. For example, the IRS has extremely strict requirements for what constitutes a qualified personal residence trust. You can only place your primary residence, as well as a small amount of cash to cover home expenses, in the trust. Any modifications to the house after the trust is created can affect the QPRT’s effectiveness too. As a result, you should consult a lawyer if you are interested in forming this kind of trust. With the lawyer, you can explore whether a QPRT is right for you.

Want to start planning your estate? Local attorney Andrew Szocka, Esq. provides thorough and speedy estate planning help in the Chicagoland area. To schedule a free initial consultation, visit the Law Office of Andrew Szocka, P.C. online or call the office at (815) 455-8430.

Will the New Federal Estate Tax Laws Affect Your Estate Plan?

You may have heard that some of the tax laws changed starting in January 2018, but you may not know how the changes will affect your estate plan. The Tax Cuts and Jobs Act made several key adjustments to the estate and gift tax exemption and the annual gift tax exclusion. Depending on your annual giving and the size of your estate, you may need to review your estate plan.

  1. Estate and Gift Tax Exemption

The new tax laws more than doubled the estate and gift tax exemptions from $5,490,000 to $11.18 million per person in 2018, and $11.4 million in 2019. The estate and gift tax exemptions are “unified”, meaning that the IRS assesses tax based on the total value of gifts that you make during your lifetime plus the value of the assets remaining in your estate when you pass away. Previously, tax would be assessed if this total exceeded $5.49 million.

Now, you can have a combination of $11.4 million in lifetime gifts and total value of assets before your estate owes tax. Since the estate tax is assessed at a 40% rate, not having to pay it can save your estate a lot of money.

There is a catch, however – the higher exemption amount expires after the year 2025. Since you may not be able to take advantage of it after then, you may want to keep your existing estate plan in place. For many people with smaller estates, the new laws will have little impact If, however, the previously lower exemption amount substantially impacted the type of planning you have done, you may want to make changes. For example, you may not need some complex trusts or certain types of language in your estate planning documents.

  1. Annual Gift Tax Exclusion

Further, the new tax laws also increased the annual gift tax exclusion from $14,000 in 2017 to $15,000 in 2018 and 2019. The annual gift tax exclusion allows you to give up to the exclusion amount in a given year to a single person without owing gift taxes on the amount.

For example, you could give $15,000 or less to your child and $15,000 or less to your niece in 2018, and you would not owe gift taxes. The IRS does not tax recipients on gifts, so your child and niece would not owe taxes for these gifts either.

While the increase in the annual exclusion may seem minimal, it takes into account inflation and allows people to do more lifetime giving. Lifetime giving reduces the overall value of your estate for tax purposes and for probate.

Want to start planning your estate? Local attorney Andrew Szocka, Esq. provides thorough and speedy estate planning help in the Chicagoland area. To schedule a free initial consultation, visit the Law Office of Andrew Szocka, P.C. online or call the office at (815) 455-8430.

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