You have a “family home” that is the gathering place for multiple generations of family members during the holidays, vacations, family retreats, or other family events. You would like that home to remain in your family. The home, whether your current primary residence or a vacation home, is also a source of a significant portion of your net worth. You’ve considered using a Qualified Personal Residence Trust to transfer the home to your children, but now doesn’t seem to be the right time, given low interest rates and reduced values because of bad economic times - or does it?

Conventional estate planning wisdom says that QPRTs should be used in high, not low, interest rate environments, because the interest rate impacts the gift tax amount to which the transfer could be subject. Given depressed housing values, however, even in a low interest rate environment, a QPRT may be an excellent way to transfer the family home to your children, as part of your overall estate planning strategy to reduce your estate for estate tax purposes, so long as you believe that the economy will, and does, recover.

Summary of Qualified Personal Residence Trusts

The QPRT is an estate planning technique to transfer a primary residence or second home to beneficiaries, such as your children, at a reduced gift tax cost. The residence is not transferred immediately, but only after a certain period of time that you choose. During that time, you retain the right to use and occupy the home as you currently do. The reason the gift tax consequences of this transfer are reduced is a result of interest rates at the time the technique is employed, your age, and the period of years that you choose. The interest rate is known as the 7520 rate which is published by the IRS monthly, pursuant to Internal Revenue Code Section 7520. The rate in effect at the time the QPRT is implemented is used. If you outlive the term of the QPRT, the home will no longer be included in your estate. But, if you desire to remain in the home after the QPRT term, you must pay a fair market rent to the beneficiaries of the QPRT. While this may not sound appealing, it’s actually a good deal from an estate planning point of view because the rent allows you to continue transferring assets to your beneficiaries in the form of rent payments, without tax consequences.

(For more information on how QPRTs work, please ask your Guardian Financial Representative for our informational memo titled “Passing Down the Family Home to the Next Generation with a QPRT.”)

What this conventional explanation misses is that housing prices do not always appreciate. The recession that started in 2008 proved that, to the dismay of many homeowners. The real question, however, is whether or not depressed values may recover.

Case Study

Let’s take an example: Joe, 65 years of age, transfers his home worth $1 million to a 10-year QPRT. If the home appreciates at a 5% after-tax growth rate and the 7520 interest rate in effect at that time is 6%, after 10 years, the residence is now worth $1,628,895, but the home has been transferred for a taxable gift of only $424,480. That’s less than half of the real initial value of the home and about a quarter of the home value after 10 years of growth.

Unfortunately, that was a couple of years ago. Today, the home is only worth $800,000 and let’s just assume that the 7520 rate is around 2.6%. The market, however, is recovering, and Joe expects values to start increasing soon. If Joe uses a 10-year QPRT, then the taxable gift is $470,472. In 10 years, if the home appreciates at a 5% after-tax growth rate the property will be worth approximately $1,303,116. Joe is still moving a significant amount of assets out of his estate at a reduced tax cost.

If the home value only declined to $900,000 and the same assumptions are used for the QPRT, after 10 years, the home is worth $1,466,005, but it is transferred at a gift tax cost of $529,281.

So, depending upon how much your home value has declined, expectations and realizations around future growth rates, QPRTs may still make sense in a low interest rate environment. The leverage is not in the interest rate, but in the fact that the home has declined in value but is expected to bottom out and move up. Remember, also, that the term of the QPRT may also be adjusted to meet your situation.

Joe, Age 65 -- 10-year QPRT, 5% After-tax Growth

Home Value	7520 Rate	Gift Tax Value	Home Value After 10 Years
$1,000,000	6.00%	$424,480	$1,628,895
$1,000,000	2.60%	$588,090	$1,628,895
$1,000,000	4.00%	$513,550	$1,628,895
$900,000	2.60%	$529,281	$1,466,005
$900,000	4.00%	$462,195	$1,466,005
$800,000	2.60%	$470,472	$1,303,116
$800,000	4.00%	$410,840	$1,303,116

Please consult with your Guardian Financial Representative if you have any questions concerning this document.

The foregoing information regarding estate, charitable and/or business planning techniques is not intended to be tax, legal or investment advice and is provided for general educational purposes only. Neither Guardian, nor its subsidiaries, agents or employees provide tax or legal advice. You should consult with your tax and legal advisor regarding your individual situation.

GEAR # 2010-8890
Approval: 09-23-2010 Expiration: 03-23-2012