What Is a Qualified Residence Trust in New York

What Is a Qualified Personal Residence Trust? www.myestateplan.com 1

“Since your home may be one of your most valuable assets, this can be a very effective part of your

wealth preservation plan.”

WHAT IS A QUALIFIED PERSONAL RESIDENCE

TRUST IN NEW YORK?

MARK S. EGHRARI NEW YORK ESTATE PLANNING ATTORNEY

http://www.myestateplan.com/




The federal estate tax is a looming threat for people who have been able to

accumulate significant wealth.

If you are exposed to the estate tax, a qualified personal residence trust could

help you gain estate tax efficiency. Before we provide an explanation, we should

look at the federal transfer tax parameters so that you can determine the extent of

your liability.

FEDERAL ESTATE TAX

There is a federal estate tax credit or exclusion. This is the amount that you can

transfer to others tax-free. During the 2014 calendar year, the federal estate tax

exclusion is $5.34 million. There are annual adjustments to account for inflation,

so it may go up a bit next year.


It should be noted that there is an unlimited marital deduction. You can transfer

unlimited assets to your spouse free of the estate tax. The $5.34 million exclusion

applies to transfers to people other than your spouse.

The top rate of the federal estate tax is 40 percent, so we are talking about a very

significant source of asset erosion.

FEDERAL GIFT TAX

The federal gift tax comes into play when you are looking at qualified personal

residence trusts, so

we should explain

this tax as well.

The tax man does

not want you to

give gifts while you

are living to avoid

the estate tax, so

we have a federal

gift tax. This tax is

unified with the

federal estate tax.

The $5.34 million exclusion applies to lifetime gifts that you give along with the

value of the estate that you are passing on to your heirs.


This tax carries the same 40 percent maximum rate, and the unlimited marital

deduction extends to lifetime gifting.

QUALIFIED PERSONAL RESIDENCE TRUSTS

Now that we have shared the necessary background information, we can look at

qualified personal residence trusts. The idea is to fund the trust with your home.

You name a beneficiary who will assume ownership of the home after the trust

term expires. This term is referred to as the retained income period.

During the retained income period, you continue to reside in the home as usual.

You decide on the length of this term. It can be five years, 10 years, 15 years, or

whatever you choose.

When you convey the

home into the

qualified personal

residence trust, you

are removing the

home from your

estate for tax

purposes. That's the

good news. The bad

news is that you are

giving a taxable gift

to the beneficiary.


However, the taxable value of the gift is going to be considerably less than the

actual market value of the home. This is because of the retained income period.

Imagine trying to sell your home on the open market. A buyer is interested, but

you tell her that she cannot assume ownership of the home for 15 years. The

buyer would be unwilling to pay the full market value under that stipulation.

The Internal Revenue Service takes this dynamic into account when the taxable

value of the gift is being calculated. As a result, the taxable value is greatly

reduced.

When the transfer takes place at the end of the retained income period, the gift

tax will be applicable, but the tax savings will be considerable.

There is something to consider when you are setting the duration of the trust

term. If you were to pass away before the retained income period had expired, the

strategy would fail, and the home would once again become part of your taxable

estate.

The longer you stay in the home, the greater the tax savings will be. However, you

do have to be conservative in light of the fact that the strategy can fall apart if you

pass away before the expiration of the term.


SUMMARY

High net worth individuals who are exposed to federal transfer taxes can gain tax

efficiency through the creation of a qualified personal residence trust.

When you execute this strategy properly, you can significantly reduce the taxable

value of your home. Since your home may be one of your most valuable assets,

this can be a very effective part of your wealth preservation plan.

To learn more about qualified personal residence trusts, set up a consultation

with a licensed estate planning attorney.

REFERENCES

The CPA Journal http://www.nysscpa.org/cpajournal/2005/1205/essentials/p52.htm Journal of Accountancy http://www.journalofaccountancy.com/Issues/2006/Oct/TheAbcsOfQprts.htm

http://www.nysscpa.org/cpajournal/2005/1205/essentials/p52.htm

http://www.journalofaccountancy.com/Issues/2006/Oct/TheAbcsOfQprts.htm


About the Author

Mark S. Eghrari

Mark S. Eghrari is an attorney in private practice in Smithtown, New

York. He has been in practice since 1988. Mark S. Eghrari provides

extensive estate and tax planning services to individuals and

businesses. Mr. Eghrari’s primary focus is helping clients avoid

probate, minimize or eliminate Federal and State Estate taxes and

protect their assets from the high cost of nursing care, if they become

ill. Mr. Eghrari’s expertise is in providing unique and innovative

estate planning solutions that create a secure future for his clients and their loved ones. Mr.

Eghrari is a member of the American Bar Association and New York State Bar Association as

well as the National Academy of Elder Law Attorneys and the American Academy of Estate

Planning Attorneys.

Mr. Eghrari completed his undergraduate work at Lafayette College in Easton, Pennsylvania

and received his MBA in banking and finance from Hofstra University on Long Island. He

earned his Juris Doctorate from the Hofstra University School of Law, where he was a member

of the Law Review. While in law school, Mr. Eghrari gained practical experience in the

corporate tax department of Citicorp in New York city.

Mark S. Eghrari and Associates PLLC www.myestateplan.com 50 Karl Avenue, Suite 202 Smithtown, NY 11787 Phone: (631) 265-0599 Fax: (631) 265-0754
