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This Article is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal adviser.

The basic building block in estate planning is a Living Trust. If you think you need a Will, you probably should have a Living Trust. A Living Trust can be changed at any time; it usually gives inheritances "equally to all my children" so it may not require amendment if you have more children; it is flexible, and it is the first tool, for almost everyone, married, single, or widowed.

A Living Trust avoids Probate. It also lets a married couple leave $1.2 million tax free.

Probate is necessary for anyone who has more than $60,000 of assets AND for anyone who becomes physically or mentally incapable. Ongoing Probate is necessary for inheritances to minors. A Living Trust avoids Probate in all of these circumstances. [See our Brochure on Living Trusts.]


If a person has assets over the tax free limits ($600,000 per person; $1.2 million for a married couple), there are a limited number of tools which may be used for estate planning for individuals. One technique is gifts.

If you are married and your net wealth is $1.8 million, there is no tax at the first spouse's death. At the second spouse's death, tax is $235,000 (assuming a Living Trust has been set up before the first death).

You can give up to $10,000 ($20,000 if your spouse consents) to any number of people every year, tax free. It's tax free to the donor, and to the recipient.

If you have 4 children and 6 grandchildren, each year you can give them $200,000; after 3 years, your estate is down to $1.2 million. Your heirs will save $235,000 in taxes.

Most clients do not have the ability or desire to give up liquid assets. "I don't want to give my kids money; I need the money myself, and knowing my kids, they would just spend it."

There are several techniques for making gifts without giving up liquidity; and your heirs cannot spend illiquid gifts! Give them shares of real estate which they cannot sell or spend.

For investment property the best gifting vehicle is a Family Partnership. For giving away shares in your residence (or vacation home) the best vehicle is the QPRT. Both of these tools have something in common: a big gift can be made to seem much smaller, legitimately, through the use of discounts. [For information about Family Partnerships, please see our Brochure.]


A useful technique to consider in making a lifetime gift is a Qualified Personal Residence Trust [QPRT]. The QPRT is a useful tool to pass wealth from parents to adult children who are mature enough to have proven long-term stability.


The parent's residence is placed in a Trust. The Trust has a duration selected by Parent. At the end of the term, the residence is distributed to the children. Then, the children own the residence and rent the property back to Parent for continued use as Parent's personal residence.

If Parent dies before the end of the trust term, since he retained an interest in the residence, the entire residence is included (at its then fair market value) in his estate, and the whole plan was a waste of time and effort. But it has no adverse consequence in terms of estate planning.

If Parent lives longer than the term of the Trust, the residence is not included in his estate and substantial taxes are saved.

If the house has a mortgage, it is no problem. Parent continues to pay the mortgage and property taxes and insurance; he gets the same income tax deductions as if the QPRT did not exist.

The 2 year rollover rules and the over-55 rules still apply, so Parent can sell house #1 and buy a new home.

QPRT Benefit #1: A gift today of $100 is a $100 gift. But a gift today of $100 which you do not get until 10 years from now is taxed as if it were a $41 gift. [The taxable gift portion is even smaller if the parent is older.]

QPRT Benefit #2: A gift today of a $100 bond making 4% which you do not get until 10 years from now is taxed as a $41 gift, but is worth $148 in 10 years.


If Parent, age 65, establishes a 10 year QPRT, at the time of formation of the Trust, he is treated as making a gift (based on IRS tables) of approximately 37% of the present value of the residence, since the gift is not final for 10 years.

Sara, a widow aged 65, is worth $1.6 million, half in liquid assets and half in her home. Sara does no planning and at her death 10½ years from now, the assets have doubled in value. Sara's heirs owe $1,208,000 in taxes.

Instead, Sara forms a QPRT for 10 years. Her gift of the house now worth $800,000 is treated as a $296,000 gift. In 10 years Sara's children get the house (then worth $1.6) tax free.

At her death, Sara then has net worth of $1.6. She has already used up $296,000 of her tax free exemption, leaving only $304,000 which is tax free. Tax is $541,200. Sara's heirs save $666,800.

If Sara does not want to move out of the house after the 10 year term, she may rent the house back at fair market rent. Then at her future death, the children sell the house (or live there). The problem is that since a lifetime gift is made, the full profit on the house is taxable. [For lifetime gifts there is no step-up in basis; rather, the basis is carried over from the parent, and the whole profit is taxable.]

[A QPRT can be done with an Asset Protection Trust for the children, to minimize the risk of giving the children $1.6 million in 10 years.]

This device is great if you want to transfer either your house (or vacation home) to your children in X years, before you die. For many clients this is not appropriate, as their children are too young to have proven their long-term stability. It is a perfect tool if:

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