Keeping the House in the Family

Posted by Brian Redhead

CAUTION: Reading this article may provoke self-inflicted slaps to the head and utterances of "Why didn't I do this five years ago?"

In 1999, Farhad Aghdami, a trust lawyer in Richmond, Va., suggested to Jim and Yolonda Roberts that they put their home in a Qualified Personal Residence Trust to shelter it fromlooming estate taxes.

Piedmont Lodge, the Robertses' white clapboard house with six portico columns sitting on 53 acres near Keswick, Va., was worth about $1.6 million back then. The trust lets them give the property to their four children for about a third of what it was valued at in 1999. The couple, now 75 years old, can live in the home for the 10-year term of the trust. When the trust expires in three years, the house belongs to the children.

Here's where you slap yourself. The home is probably worth close to $4 million now. All of that appreciation was removed from the Roberts estate. "We are very happy with how it worked out," said Mr. Roberts, a retired Exxon executive. "We love the house and wanted to keep it in the family."

You keep hearing how your home is your primary financial asset. As home prices have climbed sharply in most areas of the country, many older Americans are finding themselves living in an asset worth $1 million or more. Some also own vacation homes that have increased in value.

Add that real estate to stocks, bonds, life insurance and other property and suddenly people who thought they were just average folks could expect to have those assets subject to estate taxes after they die. Congress has set the exemption from estate tax at $2 million, but as Carrie C. Simchuk, a trust and estates lawyer at Perkins & Coie in Seattle, said, "It doesn't take all that long to get to $2 million."

That's what makes the QPRT, pronounced "cue-pert" by the experts skilled in setting up these tax-reducing vehicles, so attractive these days. During the Clinton administration, Congress made noises about limiting the trusts, but in recent years no legislator has crusaded for their abolition.

Certainly a lot of people have put aside worrying about estate taxes. After all, Internal Revenue Service statistics show that the federal estate tax was paid by only 1.17 percent of estates of those who died in 2002, the last year with published figures. That could be because few people amass appreciable estates or because so many who did accumulate wealth had hired excellent tax planners. Either way you look at it, it might seem even more irrelevant because Congress has raised the exemption to $3.5 million in 2009 and then removed the estate tax entirely in 2010. Click here to read more