According to Bloomberg News, the Clintons drafted two (Qualified Personal Residence Trusts) QPRTs in 2010, divided the ownership of their Chappaqua, N.Y. home into separate 50% shares, and then moved those shares into the trusts. They bought the home 15 years ago for $1.7 million. Bloomberg says its estimated value for property taxes is $1.8 million. This tax strategy allows the Clintons to take the value of the home out of their taxable estate and pass it to beneficiaries without any estate tax at the end of the trust's term, so long as the grantors, President and Secretary Clinton, are alive at that time.
As an Investment News article, titled "Clintons shine spotlight on tax strategy that splits a house in two," explains that this is not a tool for everybody. A QPRT really is logical for only extremely wealthy people who typically own multiple residences and face high estate taxes. The article advises that to get "the biggest bang for your buck," the residence should be appreciating in value, so that when it is passed to the beneficiary and out of the estate, it will be worth significantly more.
The current estate tax and gift tax exemptions are $5.34 million for individuals, and $10.68 million for married couples filing jointly. An ideal candidate for a QPRT is an individual or a couple whose wealth is above those limits. Why? Because if you are over the exemption amount, you will be subject to estate taxes. If you are not above the limit, it is not a worthwhile plan. With a QPRT, a couple like the Clintons are able to split the ownership of the house and each create a QPRT with an interest in the home.
There are criteria the home must satisfy in order to be eligible for the trust. For example, this works best with a secondary residence (a vacation home) instead of a primary residence. Here is the rub - at the end of the QPRT term, the home passes to the beneficiary. The beneficiary will have to start charging the grantor rent should the grantor reside there, and some parents do not like the idea of paying fair market rent to their children to live the home that has been their primary residence. Nonetheless, rent can work out as a way for grantors to transfer wealth to their kids outside of the estate, as the children must declare that rent as income. The original article also warns that there could be an economic downturn. This, in turn, might leave the grantors with little in the way of assets and no access to home equity. The house also should not have a mortgage, which can add income tax problems to the calculus.
This is not a Saturday morning job on the honey-do list: drafting a QPRT is a job that will require experienced professional tax and estate planners. Talk with your estate planning attorney if you think that you are candidate for a QPRT, or even if you are not, to see if your current strategy is the best for you.
For more information, visit HeritageElderLaw.com
Reference: Investment News (June 27, 2014) "Clintons shine spotlight on tax strategy that splits a house in two