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Aging homeowners who want to pass their properties onto their children and take advantage of their lifetime gift-tax exclusions--$2 million for couples and $1 million for individuals--might want to establish a Qualified Personal Residence Trust.
During the five- to 15-year trust term, the parent retains ownership of the house and benefits from mortgage-interest and property-tax deductions. The residence is turned over to the children without substantial gift taxes when the trust term expires, even though the real estate likely will have appreciated in value.
After turnover, the parent pays fair market rent to continue living there. The home value is discounted for trust purposes--factoring in the owner's age, the length of the trust term, and the Internal Revenue Service's monthly "hurdle" interest rate--and split to represent the value of the gift and the value of the right to reside on the premises, or the retained interest.
The gift value typically is smaller than the retained interest, lessening the tax burden placed on the heirs. Those who do not want their children to become their landlords should consider setting up another trust after the original trust term ends, appointing trustees to be in charge of making decisions about the property.
Source: Business Week (10/03/05); Gutner, Toddi
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