Part XXXII
Thomas M. Boles, 33, G.C.

I thought we were running out of new features for our shelves, but a new shipment came in and included an important new item, How To Preserve The Value Of Your Residence. I'm sure you will agree that most people's homes represent a sizable portion of their net worth and that it can be beneficial to hold on to the family home until death. Most of you are aware that your residence can then be passed on to a family member, who will get a stepped-up basis in the home: meaning, that the gain on any subsequent sale would be based on the value of the home at the date of the original owner's death. Of course, the full value of the home would be included in the owner's estate and subject to estate tax.

Giving the property to a child during your lifetime raises several concerns. Not only could this action trigger a gift tax, but the child would also take the owner's basis in the property-probably a relatively low amount-as his or her benchmark for measuring capital gains if and when selling the home.

I thought you might be interested in an excellent way to ultimately transfer the value of a home to an intended beneficiary at significantly reduced transfer-tax cost by using a special device known as a Qualified Personal Residence Trust (QPRT). Here's how it works: Tom Boles owns a waterfront residence valued at $1,000,000 (I wish). He would like his two adult children to have the home eventually, but in the meantime, he wants to continue enjoying the property. He is also concerned about the estate tax liability that will be incurred when the residence passes to his children.

Tom establishes a QPRT for a term of years, making sure that the term is somewhat shorter than his expected life expectancy. This is very important! He will live in the home for the duration of the trust; then the property will pass to his children. At the time the trust is established, he reports a taxable gift of $300,000, which represents the present value of the remainder interest. He has not previously used his unified credit, so he does not actually pay any gift tax. At the end of the term, the property has appreciated in value to $2,000,000 (I wish). Thus, the children receive an asset worth $2,000,000, but only $300,00 is subject to gift tax. (Note: This number is selected as an example. The precise amount of the gift depends on the length of the term and the applicable discount rate at the time.)

To realize this tax benefit, Tom must survive the trust term. If he dies before the termination of the trust, the entire market value will be included in his taxable estate, and he will have gained no tax benefit. Nor will he have lost anything, because the result will be the same as if he had never created the trust in the first place.

One disadvantage of putting the house in a QPRT is that the children take over Tom's basis in the residence. The basis is not stepped up as it would have been if Tom had given them the property under his will. If he had given it by will, however, the entire $2,000,000 might have been subject to an estate tax of 55%, whereas the top rate on capital gains is only 28%.

But what if you don't have children or other relatives to whom you wish to leave your home? Now, this is the good part! You can consider a charitable gift to the Scottish Rite Foundation. In this QPRT arrangement, the title passes on to the Foundation and you live in the home for the duration of your life. You will pay no gift or estate taxes and no tax on the capital gains, as you would if you were to sell your home. In addition, you will receive a significant income tax reduction; thus you will save taxes while you are living, and not change your lifestyle by a single dollar. This advantage provides benefits no matter how long you live. Which leaves my "ad" for the month to read:

What is one of the better ways you can benefit yourself and your family and, at the same time, support the Scottish Rite and its Childhood Language Disorders Program? The answer is simple: The Scottish Rite Pooled Income Fund!

The Scottish Rite Pooled Income Fund allows you and, if you wish, your wife and/or other beneficiary(ies) to receive a worry-free lifetime income as well as attractive tax benefits by joining the Fund via a financial gift to The Scottish Rite Foundation, S.J., USA. For more information call, 1-800-486-3331 or fax 202-387-1843.

Grand Commander Kleinknecht will personally respond to your inquiry. If he is not available, please leave your name and number, and the Grand Commander will return your call at his earliest opportunity. Through the Scottish Rite Pooled Income Fund, you can do well for yourself and your family while also doing good for others!

Please Note: This Information is distributed with the understanding that the author is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expertise is required, the services of a competent professional should be sought.
FROM: A Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers