Ghislain & Marie David de Lossy/Getty ImagesRich Americans can give homes to their kids before death and save on taxes with irrevocable trusts.The tax savings are bigger with interest rate hikes, but heirs who want to sell should be wary.
The estate of the original homeowner gets two big tax savings when the transfer happens. First, it only has to pay gift tax on the value of the property when the trust was established, even if the trust has lasted many years and the home has appreciated by millions of dollars in value.
These trusts have a few strings attached, but QPRTs are a fairly simple way for the rich to save on taxes and keep homes in the family.There are no restrictions on how long a QPRT can last, but the tax savings kick in only if the grantor outlives the trust, so life expectancy should be taken into account. The ideal client is in their forties or fifties as they have better odds of surviving a 10 to 20-year term, and longer trusts mean more property appreciation is excluded from their estate.
She outlives the 15-year trust and now the property is worth $1,800,944, assuming a 4% growth rate after taxes. However, none of this growth is taxed. The taxable gift – the remainder interest – is only $422,600, the difference between the initial value of the property and the retained interest.
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